Each year in September, the Economist holds a conference on the Korea economy (a part of its Bellwether series on Asian economies). They invite me to come, and then I try to write up my thoughts on it in the JoongAng Daily as an op-ed. Each year, unfortunately, we seem to argue about the same things – a proper, untweaked float of the won, and the openness of the Korean economy to foreign products and owners. Here are my thoughts from 2010 and 2011. I was so busy in the last few months on this site with the US election and other stuff, that I didn’t get a chance to reprint the JAI op-ed. But I like it, so here is the link, and here is the text itself:
“Last week the Economist magazine held its annual conference on Korea’s economy. This series is rapidly becoming the most important regular discussion in Korea for Korea’s foreign investors. Last year in these pages, I was critical of the Korean speakers’ response to foreign concerns. This year was an improvement. The finance minister particularly fielded a tough question about foreign investors’ rights in Korea in the wake of the Lone Star debacle. To his credit, he admitted what many already know from that case – that the Korean public is deeply ambivalent about substantial foreign profit-taking and ownership of major Korean assets.
No less than the Hyundai Research Institute noted earlier this year that Korea has lost perhaps 660,000 jobs due to foreigners’ wariness of investing in Korea. Koreans may dislike major foreign penetration of banking and industry, but that disdain clearly comes with a cost in lost employment. Korea’s labor force participation rate is around 24 million or 50% of the native population. Hence, if Hyundai’s numbers are correct, greater foreign investment could knock over two percent off Korea’s unemployment rate – a fairly substantial jobs gain. In the global investment community, this handicap is known as the ‘Korea Discount’ – the price in local populism and negative media attention that foreigners must pay if they operate at too great a profit in Korea. To the great credit of the government, the finance minister was willing to address this and admit that Koreans are still learning to welcome foreign firms.
While the details of Lone Star have been endlessly rehearsed, it is worth noting the broader concerns the case raises. Lone Star alleges that it faced erratic, personalized regulation, politicized government intervention, an inflammatory local media, and widespread public opinion antipathy that resulted in street demonstrations. Yet Lone Star had done what many global portfolio investors do – provided a capital injection to a struggling firm at some risk to itself. If the Korean Exchange Bank had collapsed, Lone Star would have lost a substantial amount of money. Because KEB rebounded with Lone Star capital, KEB’s many employees retained their jobs, an upside rarely admitted in the Korean debate.
We should not forget that KEB was headed toward bankruptcy, a mess the Korean government was desperate to avoid. Had the Korean government wanted to rescue KEB without foreign assistance, it might have nationalized the bank. It wisely chose not to. That Lone Star then turned a substantial profit is not a flaw – it signals KEB returned to health, and profit of course is whole point of investment. There was a clear risk that the investment would fail, another point widely unmentioned here. Media figures, and speakers at this conference, insisted that Lone Star was a ‘speculator,’ because it bought at a low price and sold at a high one (meoktwi). But this is precisely what all global investors seek, including Korean ones, such as the Korean Pension Service. Like any investment portfolio in the world, the whole point is to buy low and sell high, thereby maximizing returns. Clearly the Korean regulators knew this beforehand, and it is important that this basic principle be defended by the Korean government, both in fairness to foreigners who should not lose their WTO-guaranteed rights here, and to insure a continuing flow of job-creating foreign investment into Korea.
All this raises a crucial issue in the future for Korea, long after Lone Star is forgotten. Is the Korean public prepared to accept not just foreign job creation in Korea – which everyone welcomes – but consequent foreign ownership and profit-taking? My own sense is, not really. My impression, again and again, whether from teaching students, attending academic conferences, or simply reading the Korean business media, is that Koreans do not actually want a major foreign presence in their economy beyond the employment benefit. The presence of foreigners in chaebol ownership structures, e.g., is almost nil.
Job creation from foreign investment is obviously welcome, but the resultant foreign ownership of Korean assets and profit-making off of these assets remains suspect. My students thrill to stories of Korean exports. The Arirang TV network, created mainly for resident foreigners such as myself, bombards the viewer with stories about this or that successful Korean product conquering the world – LED TVs, smartphones, k-pop. Each month the media breathlessly detail Korea’s export surplus.
Yet there is a flipside that is almost never reported. If Korea always runs a trade surplus, as it has since the Asian financial crisis, then its export targets must mathematically always run a deficit. This is unsustainable of course, generating the much-discussed imbalances (similar to Germany’s relationship with the euro-zone periphery). If Korea always exports more than it imports, this is essentially predatory on its trading partners who must see capital permanently leak away to Korea (Korea’s 300+ billion USD reserves). This should be offset by a rising won – as Korea’s exports rise in desirability, so should the price of its currency. But this does not happen, because the Bank of Korea regularly intervenes, likely at the behest of chaebol mega-exporters, to keep the currency undervalued, a point made repeatedly at the Economist conference and by the IMF.
In short, job creation from foreign investment is welcomed, but foreign ownership, profit off-shoring, a proper currency float, and imports are not. This hypocritical and contradictory attitude is not unusual; the US Democratic National Convention last week was a similarly impossible, mercantilist mix economic nationalism and trade promotion. But Korea is vastly more trade-dependent than the US, and the nationalist backlash in the media and public opinion stronger. This may be stem from Koreans’ deep belief that they are bullied by larger states and have only their tiny sliver of land – hence it must be defended at all costs. But Koreans should also realize that economic nationalism in the globalization era comes at a cost of lost jobs and regular trade friction, a price all the higher in an economy as trade-dependent as Korea.”
Interesting reading (I liked the ‘give thanks’ posting too). Is it basic IR theory that nations generally go through a mercantile period as a developmental stage (it seems that England very much did this once too), or are all states sometimes vulnerable to mercantile tendencies? In other words, do you feel that this is part of Korea’s growing pains, or is there a real danger that the country will indefinitely put up with a certain stagnation to protect its borders?
I’m an English professor but I do teach in an IR department, and so sometimes I work with IR issues or visual rhetoric as writing assignments. I like to show my students a Korean ad for the EU trade pact–you’ve probably seen it–showing a man taking off his bowler hat while the right shows a world map covered with arrows between Korea and Europe. Except, as I explain to the students, every arrow moves from Korea to Europe and none flow back. Are you really telling the world that imports are an unpleasant and unmentionable necessity, hopefully minimized, and that essentially no one has anything worthwhile to offer you?
Because our college is also International Business, I have IB students as well. Last week a student mentioned that she runs her own hobby business, and I nearly flipped out of my chair–until I realized that she’s Indonesian. IB faculty will also tell me that their students have basically zero entrepreneurial interests, other than opening a fusion restaurant someday. Such direct foreign investment might also do a great deal to change how people conceptualize businesses and employment, and it’s unfortunate that national pride continually trumps everything.
Psy’s video actually evinced a kind of entrepreneurial imagination in that the video was made outside the K-Pop establishment and promoted independently on social networking media. I hear people say and write that ‘Gangnam Style’ proves how K-Pop is becoming internationally mainstream, missing the point that it succeeded because it did NOT originate within the normal corporate music system. It’s a rambling thought but hopefully germane.
I pretty much agree with all of this. It seems our views are very similar.
There is a fairly robust debate in IPE over whether some kind ‘infant industry protection’ phase is necessary. Certainly the US did this in the 19th C, as Asian states did it in the last 50 years. But even if one accepts that as necessary (I don’t), Korea is basically beyond that now. Korea’s not really a ‘developmental’ state anymore. Korea really needs to transition from gimmicky mercantilism to more normal market liberalism. The alternative is going the way of Japan, which also refused to give up the developmental model and embrace a more open market economy. (I just made this argument for a cover story for Newsweek Japan: http://www.newsweekjapan.jp/magazine/88204.php. Unfortunately, they don’t have a translation up; I’ll post it soon.)
As you say, what’s most important is getting Koreans to be comfortable both importing and exporting, to stop thinking of trade as a mercantilist competition, in which a trade surplus means ‘victory,’ and a deficit means a ‘defeat’ by foreigners. I spend a huge amount of time on this in class, but the Korean business media is totally unhelpful. Their portrayal is relentless that Korea is not in good economic health unless it runs a trade surplus. That is not true. That’s chaebol propaganda, which they exploit to keep the won undervalued which punishes Korean consumers for the benefit of the chaebol. I just wish the chaebol didn’t have this enormous lock on the national imagination. It is so unhealthy in so many ways: http://thediplomat.com/2012/11/18/apple-samsung-and-s-koreas-growing-pains/
And you are 100% on Psy – whom Time is apparently considering for Man of the Year………………….[fail]………………………………..
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