Nonsense, horsefeathers, and idle musings from a decade in South Korea (2002-2012).

22 December, 2009

Answer Me This

By Aaron
22 December, 2009

If lowering or eliminating tariffs aids the economy now, why have them at all in the first place?

From today's Joong Ang Ilbo:
The Ministry of Strategy and Finance said yesterday it will lower tariffs on 46 imported items including oil, gas, sugar and corn next year to back an economic recovery trend.

According to the ministry, the policies will help keep the public utility costs from rising sharply and expensive imports from triggering inflation.

20 December, 2009

Equal Every Which Way

By Aaron
20 December, 2009

"The best things and best people rise out of their separateness; I'm against a homogenized society because I want the cream to rise."
-Robert Frost

In his 1961 story "Harrison Bergeron," Kurt Vonnegut tells of a society in which everyone is finally equal. "They weren't only equal before God and the law. They were equal every which way. Nobody was smarter than anybody else. Nobody was better looking than anybody else. Nobody was stronger or quicker than anybody else. " And so, graceful ballerinas, to take one example, had to wear hideous masks and sandbags so that, on seeing them, other people wouldn't "feel like something the cat drug in." The maintenance of such perfect equality fell to the Handicapper General.

Vonnegut, of course, wrote fiction, but the best fiction always has one foot in reality, which is why I won't be shocked if the South Korean government establishes its own Office of the Handicapper General one of these days. The latest insinuations of such a move come from - where else? - the Education Ministry, which yesterday announced that students who have received private education services (at, for example, a language or test-prep institute) will be disadvantaged in the admissions process for local foreign language high schools. This move is ostensibly being made to curb the so-called "private education fever" in which, as I wrote last year, parents seek to compensate for the poor quality of public schools by enrolling them in private institutes. The presumption, of course, is that wealthy families are more likely to spend the money on these lessons, thus giving them an unfair advantage in said admissions process. Yet, rather than addressing the problems of its own schools, the Education Ministry has opted to punish Korean citizens for the faults of the state-run school system.

As of 2011, then, foreign language high schools will introduce admissions procedures that emphasize "self-study." Aside from the practical difficulties of enforcing such a policy (it will, notes the Joong Ang article, require interrogations of the students), there's no inherent reason why learning via self-study is superior to learning in an institute. If you were facing surgery and had the choice of doctors, would you choose the best doctor available - one who was probably trained in an institution, maybe even a private one - or would you insist on having a self-taught surgeon perform your procedure? The same question can be similarly applied to nearly every profession, from auto mechanics to architects to tailors. Why should school admissions be any different? The point isn't that a self-taught person cannot succeed, but rather that if the Education Ministry seeks to follow its current policy to the logical extreme it should close down all schools and universities, public and private alike. After all, we wouldn't want students learning anything from someone else.

In addition to targeting those dastardly private institutes, this policy, just as other proposals in the past, has as its underlying goal the equalization of educational opportunity across Korea. While this may be a noble goal, a country such as Korea, which lacks natural resources and thus relies on the brains of its citizens for economic prosperity, will not profit by punishing people who seek, and can afford, better educational opportunities than those offered by the government. Reducing the opportunities available to one segment of the population merely lowers the overall level of human capital in a society. And sandwiched as it is between two powerhouse Asian economies, Korea simply cannot afford to be handicapping its citizens.

And so, Education Ministry take note: it's time to let the cream rise.

Update: Chris Backe offers a similarly sour evaluation of this situation.

19 December, 2009

The KIKO Rodeo Continues

By Aaron
19 December, 2009

Brace yourself for some temerity, because I'm about to scratch my head in puzzlement and call into question the statements of a Nobel laureate in economics. The Joong-Ang Ilbo reported on Friday that Robert Engle, co-winner of the 1993 Nobel, was in Seoul last week to testify on behalf of Dorco, a Korean manufacturing firm that got burned in last year's KIKO debacle. In his testimony, Engle claimed that - and you'll want to brace yourself for this stunner - the banks selling these currency contracts were seeking to maximize their profits. Commence peeling yourself off the floor.

But let's step back for a moment and get a refresher on the nature of KIKO ("Knock-In, Knock-Out") contracts and why they suddenly became a problem late last year (via The Korea Times):

KIKO options allow businesses to sell dollars at a fixed won/dollar rate if the exchange rate stays within the range fixed in the contract. If it soars above the upper limit, however, exporters can sustain huge losses, as they have to pay more for dollars on the currency market to sell them at the fixed rate to the banks. With the won plunging against the dollar in recent months, many local businesses suffered massive losses and are now on the brink of bankruptcy.

The Seoul Central District Court then stepped in last December and ruled that the KIKO contracts between SC First Bank and two Korean exporters were invalid, saying that the bank did not adequately inform the companies of the risk involved in the contracts, a ruling which opened the door for further lawsuits. Yet, as I wrote in January, ignorance should not be a valid defense for the companies that purchased these contracts.

And despite Mr. Engle's testimony, I stand by that opinion to this day. One of the greatest moral traits of free markets is that they rely on voluntary cooperation, which means that if a deal doesn't suit you, you can walk away from it. This, however, requires discretion on both sides, that is, the proper consideration of risk and opportunity. If you feel you don't have enough information about a product or service to make an informed decision, then walk away. You are allowed to do so.

To be fair, the Joong Ang article does not quote Engle as saying that firms should be protected from the consequences of their mistakes. Rather, according to the article, he asserts that "the knock-in knock-out contract, also known as KIKO, was designed so that banks would benefit far more than the small businesses that bought the risk-hedge derivative products." No doubt many will jump up, waving their arms in indignation at the notion that both sides did not reap precisely the same profit, but there is no particular reason why this should be so.

Sean Hayes, writer of the Korea Law Blog and a consultant to the law firm representing 50 of the KIKO plaintiffs, however, sees it differently:

In some cases...clients were asked to sign English-language contracts, despite being unable to speak English. He recalls sitting down with one plaintiff: "He pointed at a word and asked what it meant. The word was 'buyer'. He didn't even know what 'buyer' meant."

In other cases, no contract was sent - the only documentation the client received was the trade confirmation. Some companies apparently felt that getting loans in the future was conditional on buying the kiko. Others were rushed into the decision on the basis of a quick, five-minute sales pitch. Most of the companies were too small to have a derivatives governance structure - typically, the authority to go ahead with the trade rested with one person, who was the business owner or the person looking after the company's finances, he says.

All of which merely seeks to excuse ignorance and rationalize a bad decision. But it's a bad decision that's already been made and the courts seem willing to protect the companies from the consequences, so all we can do here is try to draw a few lessons for the future. Here they are: First, if you don't speak English, then don't sign a contract written in English. Second, if you don't have a staff capable of handling these sorts of financial matters, be aware of your own limitations and think twice about signing something you don't understand, no matter how pretty and promising it might appear at first glance. And finally, banks are not obligated to loan their money to your company.* If they want to make your future loan availability conditional on present KIKO purchases, they can probably do so. If they want you to do naked cartwheels down the middle of Main Street in exchange for future loans, they can probably do that, too. It's their money, you're asking to use it, and, as such, you'll have to meet their conditions. You don't like the conditions? Go elsewhere, or use your own money.

In order for markets - indeed, for society - to function, courts must enforce the terms of contracts as written, not the terms as an embittered party wishes they had been written. Unfortunately, the initial district court ruling last year set a terrible precedent and opened the door for other companies seeking to wiggle out from under the fallout of their own blunders. Accusing banks of reaping "excessive" profits may succeed in distracting attention from this reality, but it doesn't change it.

* Actually, they might be obligated. Korean commercial banks are required to provide more than a specified proportion of their loans to small and medium-sized enterprises (SMEs).