Lee Myung-Bak & The Diamond Dilemma

See that picture up there, the one with all the handshakes and expensive suits and apple-polish grins? Well, depending on your view, it shows either a gathering of Korea's business and political leaders, or a potent police line-up (L to R: Hanwha Chairman Kim Seung-youn; Hyundai's Chung Mong-koo; Samsung’s Lee Kun-hee). Actually, it's both. The photograph is also a telling depiction of Korea's present economic situation - a snapshot of the "Korea Discount," caused by the opacity, rigidity and corruption that plague this country today.

A few local media outlets have dubbed those fellows Korea's leading entrepreneurs, despite the fact that they each inherited their empire from their fathers. They've done well for themselves, to be sure, and here they are shaking hands with President-elect Lee Myung-Bak. In recent years, however, each of these men (including Lee Myung-Bak) has spent a fair chunk of his time fending off charges of corruption and, in Kim's case, an incident befitting Tony Soprano. Go ahead, click their names and see for yourself what they've been up to.

Yes, those guys are Korea's leaders - a worrisome truth, to say the least.

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In late December, 2007, Koreans went to the polls and, putting misgivings about his ethics aside, elected Lee Myung-Bak as the next president. Provided the prosecutors don't pin him down on corruption charges, Lee will take office next month, succeeding a man, Roh Mu-Hyun, who continually found new ways to louse up the country. Whether it was his idea to lower real estate prices by also capping the supply of homes; telling universities who they could or couldn't admit; cozying up to North Korea; declaring that he would dismantle the Chaebol - well, let's just say Roh never disappointed in finding new ways to disappoint.

And so, in rides Lee, a former Hyundai executive and Seoul mayor with a reputation for setting grandiose goals and then achieving them. He's touted as a git-'er-done, don't-bullshit-me leader who eschews ideology in favor practical solutions. Koreans elected Lee in hopes that he'd let loose the economic reigns and pull Korea out of the malaise in which it's been stuck for the past few years, and Lee has responded by promising to cut red tape and achieve a goal of 7% economic growth in 2008.

By now, the conventional wisdom has it that Lee is "pro-business," a description of the fellow meant as a compliment and one that has been repeated ad nauseam since the early days of the presidential campaign. And I hope they're right, but I worry that no one - least of all those conglomerate chairmen in the picture above - really wants it to be true.

In a timely bit of reading on my part, I recently finished Diamond Dilemma, Tariq Hussain's insightful analysis of Korea's present economic woes and his ideas on how they might be remedied. In his book, Hussain repeatedly takes Korea to task for, as he puts it, being more "deadlocked" than "dynamic" and for maintaining an economy that is still largely allergic to open, global competition.

For most Koreans, globalization means Korean products conquering the world, Koreans going abroad and Koreans being recognized around the world. It does not necessarily mean accepting foreign companies' takeover of a major Korean company. For most Koreans, globalization means being the "best, biggest, first." It does not necessarily mean accepting global standards, or playing by global rules of accountability and transparency. (186)

In perhaps no area is this attitude more evident nowadays than in the case of Lone Star, an American private equity firm that bought a controlling stake in Korea Exchange Bank in 2003, back when the bank was in deep financial straits. The Korean government is now accusing Lone Star of having purchased its stake in KEB at an artificially low price, though most observers sense that Lone Star's crime was in being a foreign company that made a hefty profit on Korean soil. As Hussain points out - citing the local success of Newbridge Capital, the Carlyle Group, and Citigroup - this is hardly the first such incident to arise on this peninsula. The government's first reaction is generally to launch tax raids on the local offices of these companies. Having found no evidence of anything outside sharp investment strategies, the government has since floated the idea of building its own domestic network of private equity firms to compete with the foreign invaders. Yet, as Hussain goes on to point out:

[The Korean government] fundamentally overlooked the role of private equity investors in bringing in capital, putting in new managment, restructuring the company, and pitching the company to an interested foreign multinational. This process is crucial for restructuring the economy, and can hardly be emulated by domestic funds. The high returns earned represent, above all, the inherent risk factor in investing in Korea - partly by unpredictable attitudes toward foreign investors. [emphasis mine] (146)

I worry, then, that when Koreans say that Lee Myung-Bak is "pro-business," what they really mean is that they hope he is pro-Korean business, in the sense that he will return the country to the days when the government subsidized Korea companies (who then guaranteed lifetime employment) while protecting the local economy from the rigors of global competition. Business is, after all, so much easier when one isn't forced to worry about being profitable.

This immunity from competition, in addition to producing inefficient firms, has allowed a host of other problems to fester within the country: companies have less incentive to hire and promote females; a simultaneous system of collusion and gridlock amongst labor, government and business has taken root; and Korean universities produce a lot of managers, but precious few leaders. It may be a oversimplification to say that making Korea a free trade zone would solve these problems overnight, but such a policy would be a necessary step in that direction.

As Hussain notes, Korea's economic structure worked well when it was a developing nation, trying to catch up with and join the league of advanced economies. The problem is, this catch-up structure won't allow Korea to excel in the 21st century and compete in the global economy, particularly in light of the rise of a certain neighbor to the west (the proximity of which can also be an asset, if used properly).

None of these changes, however, will come easily. Lee Myung-Bak is going to face some brisk resistance if he does in fact move forward with the changes necessary to revitalize Korea's economy. In particular, I wonder if he's up to the task of confronting the culture of corruption that has permeated Korean government and business circles, particularly when those in need of confrontation on this front may include the likes of his former associate, Hyundai's Chung (pictured above).

One reason, among many, that the United States is the world's leading economy is that it offers a high degree of relative transparency and investor protection (recent woes aside), such that the likes of Jeff Skilling of Enron and Dennis Kozlowski of Tyco go to prison for their crimes. In Korea, by contrast, men like Chung are let off when judges decide that imprisoning him would have an adverse effect on the economy. What results, however, is this "Korea discount," described by Hussain as "the underperformance of Korea's stock market due to its lack of transparency and minority shareholder protection."(183) Hussain further notes that "Korea's notoriously poor ratings in terms of corruption are an indication of the excessive power of a few interest groups." We're thus left with a system that allows convicted criminals like Chung and Kim Seung-youn (above) to walk free, but which hounds foreign investors who've made a local profit.

As Korea's constitution only allows presidents to serve a single five-year term, Lee Myung-Bak will be necessarily limited in what he can accomplish during his time in office. My guess is that, while he may make some headway toward liberalizing the Korean economy, the interests of the government bureaucracy, the conglomerates and the labor unions (a post topic in itself) are so entrenched that five years won't be enough for Lee to do much more than set a tone for the following administration. Even that modest goal, though, will be a battle.

Let's hope he's up to the fight.