View fron Seoul: Deregulation has a long way to go

SOUTH KOREA'S conservatives are upset. Their whinge goes something like this: 'Democracy may be fine for improving human rights and freedom of speech, but look what it has done to our economy.'

From double-digit economic growth in the 1980s, Korea's economy has slowed to an estimated 5 per cent growth rate this year - in the last quarter it barely managed an annualised 3 per cent growth. Those with a grumpy nostalgia for the old authoritarian ways blame it on a slackening of workers' morale and a greater bargaining power for the labour force, which has driven up wages so high that Korean goods have lost their competitiveness overseas.

It is true that wages have increased sharply in Korea, but it is misleading to blame the nation's economic woes on this alone. Nor have Korean workers gone soft - on average they still work 2,500 hours a year - more than the 2,108 hours worked in Japan and the 1,800 average in Western Europe.

In fact the South Korean economy has exhausted its growth potential in the low- wage, mass-export business, and now needs to make a quantum leap into the developed, high-technology economic spectrum inhabited by Japan and the developed Western nations. The cheap clothes, running shoes and low-tech goods that Koreans turned out en masse in the 1970s and 1980s are now even cheaper when manufactured in Indonesia, Thailand or southern China.

South Korea, as all the three main candidates in yesterday's presidential elections agreed, needs a new direction. Finding this will be the new president's biggest challenge.

The main symptoms of the economic malaise are glaring. Protectionism, over- regulation of the financial sector and high interest rates have made the country increasingly unattractive for foreign investors, while at the same time hampering domestic companies from investing in new research and development. Currently Korea spends about 2 per cent of GNP on R&D, compared with the 3-5 per cent norm in more developed economies.

With Korean products lagging in the high-tech stakes, companies have been forced into price-cutting to keep up their sales - with the inevitable damage to profits. Last year, for example, Hyundai Motors, Korea's largest car company, increased its sales by 21 per cent - but profits dropped by more than 20 per cent. Similarly, Samsung Electronics boosted its sales by 16 per cent, but profits fell by 6 per cent. Trapped at the lower end of the markets they operate in, Korean firms are running out of space to expand.


To turn this situation around, all three candidates said during their campaigning that they would move to deregulate the economy and make it more open for foreign trade and investment. The US and European governments have repeatedly told the South Korean government that it will not get access to high-tech investment unless its markets are more open to foreign goods.

Protectionism exists not only in formal exclusion or tariff regulations, but also in shady ways right across the economy. Imports of luxury foreign cars, for example, are permitted - but those wealthy Koreans who have indulged in Jaguars or Mercedes have suddenly found themselves subject to a government tax audit.

At the same time most economists in Seoul argue that the sprawling chaebols, or conglomerates, need to specialise in particular industries rather than continue their current strategy of extreme diversification. The top 30 chaebols account for 42 per cent of the country's economic activity. Daewoo, one of the big four, even boasts in its advertisements that it is 'in everything from A to Z'.

But their size gives the chaebols formidable political influence. Although the government last year tried to force them to concentrate on three 'core business areas', the bigger ones continue to produce everything from microchips to shampoo.

Interestingly, the candidate who argued most forcefully for the breaking up of the chaebols during the presidential campaign was Chung Ju Yung, the businessman- turned-politician who himself founded one of the biggest chaebols, Hyundai.

The other two candidates were more circumspect about criticising the chaebols, preferring instead to emphasise the need to support small and medium-sized high-tech businesses - largely by reducing the cost of capital for new investment.

But economic deregulation still has a long way to go and the difficulties facing reformers have been highlighted in the move to allow foreign investment in the Korean stock exchange. Despite strong domestic opposition to allowing foreigners to control shares in Korean companies, the Ministry of Finance finally opened the Seoul exchange to foreigners in January this year. The opening was accompanied by a host of restrictions, including a ceiling of 10 per cent of any company's shares that can be bought by foreigners and a complicated registering system for any would-be investor.

None the less, foreign investors seeking to diversify their Asian portfolios and attracted by Korea's underlying economic strength have already bought some pounds 1bn in Korean stocks. The largest single group of investors has been British, accounting for 43 per cent of the total foreign investment.

However, during the year the stock market headed inexorably downwards. From an all-time high of 1,077 in April 1989, the stock price index kept slipping until it reached 459 in August.

Anxious about the fall-out in the forthcoming presidential elections, the government announced that local institutional investors were to be required to boost their stock holdings by pounds 2.7bn over the next year, and that the official stock market stabilisation fund was to be increased by pounds 400m. This started a modest rally in the exchange, which attracted increased foreign investment.


But with everyone very jumpy, rumours went around that the foreigners were only looking for quick profits - even though Korean investors have traditionally treated their exchange like a glorified casino with little regard for fundamental strengths of the stocks they buy and sell. Whipping up the anti-foreigner sentiment, one newspaper, apparently without a scrap of evidence, speculated that some of the foreign money was from drug trafficking or arms trading.

The anti-foreigner sentiment rose to such a pitch that the Ministry of Finance was forced to intervene. The head of the ministry's international finance bureau patiently pointed out at a press conference that the influx of foreign money would strengthen the market. And the ministry produced figures showing that the turnover rate (the number of stocks bought and then sold again) of foreign investment in Korean stocks was 59 per cent since the beginning of the year, compared with 97 per cent for domestic investors - clearly showing that foreigners had a much greater interest in long-term investments than the Koreans themselves.

The 'hot foreign money' story quickly died a death, but not before it showed the depth of resistance to change in the country's financial and economic system.

peoplePerformer had recently been diagnosed with prostate cancer
The surrealist comedian at the Q Awards in 2010
Arts and Entertainment
Media baron Rupert Murdoch owns News Corps and 20th Century Fox
theatrePlaywright David Williamson is struggling to find a big name to star as the media mogul
ebooksAn unforgettable anthology of contemporary reportage
Russell Brand arriving for the book launch in East London
peopleRussell Brand cancels his book launch debate due to concerns about the make-up of the panel
Arts and Entertainment
JK Rowling will not be releasing a 'romance' novel anytime soon
Life and Style

Of all the computers Apple has ever made there’s only one that Steve Jobs had to sell his car to finance

Arts and Entertainment
Sarah Dales attempts to sell British Breeze in the luxury scent task
tvReview: 'Apprentice' candidates on the verge of tears as they were ejected from the boardroom
One of the 'princesses' in the video
videoYouTube reinstates sweary video after takedown for 'violating terms'
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

SQL Developer with T-SQL, Watford, Hertfordshire - £350 - £360

£350 - £360 per day: Ashdown Group: SQL Developer with T-SQL, Watford, Hertfor...

IT Systems Business Analyst - Watford - £28k + bonus + benefits

£24000 - £28000 per annum + bonus & benefits: Ashdown Group: IT Business Syste...

Trainee Recruitment Consultant - Birmingham - Real Staffing

£18000 - £23000 per annum + Commission: SThree: The SThree group is a world le...

Trainee Recruitment Consultant Birmingham

£18000 - £23000 per annum + Comission: SThree: The SThree group is a world lea...

Day In a Page

How could three tourists have been battered within an inch of their lives by a burglar in a plush London hotel?

A crime that reveals London's dark heart

How could three tourists have been battered within an inch of their lives by a burglar in a plush London hotel?
Meet 'Porridge' and 'Vampire': Chinese state TV is offering advice for citizens picking a Western moniker

Lost in translation: Western monikers

Chinese state TV is offering advice for citizens picking a Western moniker. Simon Usborne, who met a 'Porridge' and a 'Vampire' while in China, can see the problem
Handy hacks that make life easier: New book reveals how to rid your inbox of spam, protect your passwords and amplify your iPhone

Handy hacks that make life easier

New book reveals how to rid your email inbox of spam, protect your passwords and amplify your iPhone with a loo-roll
KidZania lets children try their hands at being a firefighter, doctor or factory worker for the day

KidZania: It's a small world

The new 'educational entertainment experience' in London's Shepherd's Bush will allow children to try out the jobs that are usually undertaken by adults, including firefighter, doctor or factory worker
Renée Zellweger's real crime has been to age in an industry that prizes women's youth over humanity

'Renée Zellweger's real crime was to age'

The actress's altered appearance raised eyebrows at Elle's Women in Hollywood awards on Monday
From Cinderella to The Jungle Book, Disney plans live-action remakes of animated classics

Disney plans live-action remakes of animated classics

From Cinderella to The Jungle Book, Patrick Grafton-Green wonders if they can ever recapture the old magic
Thousands of teenagers to visit battlefields of the First World War in new Government scheme

Pupils to visit First World War battlefields

A new Government scheme aims to bring the the horrors of the conflict to life over the next five years
The 10 best smartphone accessories

Make the most of your mobile: 10 best smartphone accessories

Try these add-ons for everything from secret charging to making sure you never lose your keys again
Mario Balotelli substituted at half-time against Real Madrid: Was this shirt swapping the real reason?

Liverpool v Real Madrid

Mario Balotelli substituted at half-time. Was shirt swapping the real reason?
West Indies tour of India: Hurricane set to sweep Windies into the shadows

Hurricane set to sweep Windies into the shadows

Decision to pull out of India tour leaves the WICB fighting for its existence with an off-field storm building
Indiana serial killer? Man arrested for murdering teenage prostitute confesses to six other murders - and police fear there could be many more

A new American serial killer?

Police fear man arrested for murder of teen prostitute could be responsible for killing spree dating back 20 years
Sweetie, the fake 10-year-old girl designed to catch online predators, claims her first scalp

Sting to trap paedophiles may not carry weight in UK courts

Computer image of ‘Sweetie’ represented entrapment, experts say
Fukushima nuclear crisis: Evacuees still stuck in cramped emergency housing three years on - and may never return home

Return to Fukushima – a land they will never call home again

Evacuees still stuck in cramped emergency housing three years on from nuclear disaster
Wildlife Photographer of the Year: Intimate image of resting lions claims top prize

Wildlife Photographer of the Year

Intimate image of resting lions claims top prize
Online petitions: Sign here to change the world

Want to change the world? Just sign here

The proliferation of online petitions allows us to register our protests at the touch of a button. But do they change anything?