Part one is here, where I argued that Korea is too mercantilist-corporatist and that Korean consumers carry the costs of that statism with their 155% household debt-to-income ratio. I published an op-ed based on these posts also, at the JoongAng Daily here.

b. When the idea of Korean banks functioning globally arose, the Korean speakers argued for a mega-bank so that Korea could ‘compete’ and support its MNCs overseas. Again the idea that Korea as entity must compete against other states and ‘their’ MNCs is a fundamentally mercantilist notion. Korea is not competing against anyone, in the liberal view. Firms compete, and consumers, as rational buyers weighing quality against cost, should not buy ‘nationalistically.’ No one said anything like this: that Korea’s banks should simply evolve as they pursue profitability and if some of them M&A into a mega-bank, then ok. Instead, the state officials (not private bankers) were saying Korea needed a ‘mega-bank.’ Sounds an awful lot like another flag-carrying national champion, like Samsung, or Air France, with lots of cheap government capital and buddies in the bureaucracy, no? One of the Economist hosts thankfully had the temerity to call this a ‘vanity project.’ Hah! That was the most insightful line of the day.

c. Next up was was the limits on foreign penetration into the Korean bond market. Preventing foreigners from buying your debt is a classic form of financial mercantilism. The Japanese have been doing this for years in order to retain the yen as an autonomous domestic policy tool. This is why Japan’s debt-to-GDP ratio is the highest in the world, but its bond rating stays high – all that debt is ‘in-house.’ The Japanese refused to internationalize the yen, because that means foreigners, especially Wall Street and the IMF, get a bigger say in how you run your economy. Witness the Greece meltdown today, and the increasing usurpation of Greek economic autonomy by Germany, the ECB, and the IMF, because so many foreigners own Greek debt. Nationalist-statist Asians would never permit that level of internationalization. They are too obsessed with sovereignty to resolve the ‘trilemma’ with Friedman’s ‘golden straightjacket.’ The Chinese also do this – selling bonds to domestic firms and banks at ridiculously low interest (so treating Chinese depositors as a slush fund for cheap capital) and preventing the RMB from off-shoring. And Korea does it too. It has repeatedly been kept off the World Government Bond Index, because of its ‘macroprudential capital controls’ – a euphemism for the ROKG’s closure of the kimchi bond market when too many foreigners started buying them because the won is undervalued.

d. Another missed opportunity was inflation. Korean inflation is now over 5%! That is twice the Bank of Korea’s (BoK) target. There is strong suspicion that this is coming from ROKG F/X ‘fine-tuning’ – pardon me – ‘smoothing.’ Among other things, Korean consumer spending is not exploding and so pushing up prices. In fact, it is the opposite, because Korea’s consumer debt (155% of income) is one of the highest in the world. Nor is the BoK monetizing Korea’s debt, another fairly typical inflation-accelerator. Korea’s debt and deficit are low and under control. This suggests that F/X fine-tuning/smoothing/whatever you want to call competitive devaluation (ie, buying dollars and selling won) is what is driving up the money supply. Yet the speakers told us that inflation had to be balanced against growth, i.e., don’t expect an big interest rate hike. This sentiment makes sense in the low-growth US or euro-zone, but not 4%-growth-a-year Korea. So Korean consumers once again get the shaft with a depreciating currency coupled with crushing personal debt. Tell me again that Korea is not a corporate oligarchy punishing consumer and SMEs to reward mega-exporters?

In the end, the back-and-forth was too congenial, allowing too many of the speakers to spin and duck hard issues. Last year I thought the questioners pushed Korean officials a lot harder. It was disappointing this time, maybe because the officialdom level was higher this time. Who wants to publicly challenge the finance minister? Last year was indirectly revealing for the way Korean officials bobbed-and-weaved to avoid answering hard questions about capital controls. This signaled pretty clearly that they were in fact competitively devaluing the won.

This year, no one really tried much. I pushed a bit. I asked a troublesome question – does the Korean government sterilize the won’s appreciation at the behest of Korea’s big exporters? (The right answer is yes.) I have written about this before (here and here), and variants of this question were asked last year too. But my official didn’t try hard. It was spin; he didn’t even make reference to the chaebol in his answer, even though lots of people in the room were convinced (because variants of my questions popped up all day) that they they are the ones pulling the F/X strings to keep export prices low. But no one answered it really. In fact, not one Korean speaker even used the word chaebol the whole day, which left me bemused and disappointed.

The most courageous question came from a Korean who asked a panel point-blank if Korea had the creativity and openness to foreigners necessary to really grasp globalization. This is a major issue; I argued last year that cultural hesitation, not technical or ideological barriers, is the real hurdle to the internationalization of the won. Yet none of the Korean panelists even blinked. A fog of silly disconfirmations about the creation of Hanguel or the (supposed) global popularity of K-pop and Korean food were thrown out to suggest Korean is a creative open economy. Yawn. At that point I overheard the Economist guys talking about how the same issues come up year and again regarding international finance and Korea, but nothing seems to happen. Exactly.

The ideas in this post and the next expand on the arguments made in my recent JoongAng Daily op-ed.

Every year the Economist runs a series of conferences on the political economy of Asia. If you are in this part of the world, you should probably go if you can. Here is the link for this year’s on Korea, and here is my review of last year’s. I thank the Economist‘s East Asia staff for inviting me. They are generous enough to realize that academics could never find the $1000 door fee. Sigh. It’s fairly embarrassing to the profession that we have to be comp’d in order to get into these sorts of things. And it is a good reminder that when it comes to the real world and stuff that matters (ie, money), professors scarcely matter. 😦 As with last year, I found it ‘maturing’ to sit in a room with very wealthy people, in very nice suits, focused on the very serious business of making lots of money. ‘Plutonomy’ is pretty imposing.

The Korean line this year from the officials present, including the finance minister, was that Korea is a “small and open economy.” This is manifestly untrue, by OECD standards of openness, and it was disheartening to see so little honesty about how deeply intertwined the Korean government is in the economy. The people from Moody’s in the lobby were even handing out a report about Korea’s ‘public policy banks.’ There is a lengthy political economy literature on Korean statism, and for those who like the idea of state intervention in the economy, Korea is a widely used example. Korea is better defined as small and corporatist, with latter deployed to overcome the former. Korea is sharply divided economy with tight but large conglomerate bloc at the top (the chaebol) overawing the rest of the economy. These firms get such generous access to the state, and its budget and moral approval, that Korea, Inc. is more liberal corporatism than liberalism. And Korean consumers, with debt at 155% of household income (one of the highest ratios in the world), pay out the nose to prop of this oligarchy.

Industrial policy is a reflex here; I see it all the time. Every time I ask my students about some change in the Korean economy, their first response is to say the government should do this or that about it. I get paper after paper about how the government should spend on this or that critical or strategic industry, or how Korea must outcompete Japan, or how the Korean government should ‘lead/guide/administer/direct/run’ the economy. I almost never get liberals in my classes, although to be fair, when I get Japanese and Chinese students, they talk the same way. Korean academics at conferences here are similar. I almost never hear the run-of-the-mill liberal notion that the economy should simply evolve as it will, without direction from the state. When I tell my students that the American car industry deserves to take a beating for making poor vehicles, they look bewildered. When I tell them that Apple should have pounded Samsung in the smart phone wars, except that the ROKG kept the iPhone out with NTBs for 2 years, they tell me that was a good thing. When I tell my students that the jeonse security deposit system doesn’t exist in the US, and that even lower middle class Americans can afford to move out during college, they are amazed. (The jeonse system is one of the most regressive, upwardly redistributive, oligarchy-reinforcing,  middle class-crushing elements of the Korean economy.) And indeed you could see the mercantilist reflex all over the conference, even though no one wanted to say it.

a. When the issue of exchange rates came up, the same division as last year of foreigners vs. Koreans arose. The Korean speakers all defended the interventionist notion that Korea had to ‘compete’ with yen and the dollar, and should value the won against them. That pegging like this is in fact exchange rate manipulation (as the Japanese FinMin said last week) was simply not admitted. That is it unnatural for Korea’s economy to grow faster than the US and Japan while the won does not appreciate meaningfully against their currencies was unanswered. I saw Bernie Lo on MSNBC a few weeks ago note that Korea has grown 4x faster than the US in the last 2 years, but the currency has appreciate by just 10% or so. Wow; that’s so unnatural, it can’t possibly be explained without targeted intervention. Not one speaker defended the liberal notion that Korea’s currency should simply float; in fact, I am not sure I even heard the word ‘liberal’ or ‘float’ the whole day. Last year, the euphemism for such competitive devaluation was ‘fine-tuning;’ this year it was ‘smoothing.’

b. When the idea of Korean banks functioning globally arose, the Korean speakers argued for a mega-bank so that Korea could ‘compete’ and support its MNCs overseas. Again the idea that Korea as entity must compete against other states and ‘their’ MNCs is a fundamentally mercantilist notion. Korea is not competing against anyone, in the liberal view. Firms compete, and consumers, as rational buyers weighing quality against cost, should not buy ‘nationalistically.’ No one said anything like this: that Korea’s banks should simply evolve as they pursue profitability, and if some of them M&A into a mega-bank, then ok. Instead, the state officials (not private bankers) were saying Korea needed a ‘mega-bank.’ Sounds an awful lot like another flag-carrying national champion, like Samsung, or Air France, with lots of cheap government capital and buddies in the bureaucracy, no? One of the Economist hosts thankfully had the temerity to call this a ‘vanity project.’ Hah! That was the most insightful line of the day.

Part two of this post is here.