Reviving a ‘Can-Do’ Spirit : South Korea’s Crisis in Confidence Undermines Its Rapid Growth

In the Myongdong shopping district in the city center, vendors who just a few years ago crowded the sidewalk hawking cheap trinkets from wooden stalls are gone. Now the streets are lined with trendy boutiques that sell the latest designer clothes--at New York prices.

At a nearby Japanese restaurant, a young Korean couple, both university professors, remark on the conspicuous consumption everywhere. Then they sheepishly admit that they are a two-car family.

South Korea has all the trappings of a wealthy, highly industrialized country. Last year, as much of the world dipped into recession, Korea’s economy expanded by an impressive 9%. It looked like a continuation of the incredible Korean success story: A nation colonized by Japan for nearly four decades, then demolished by war, pulls itself up by its bootstraps in a single generation to become a world producer of steel, ships, cars and videocassette recorders.

But something is missing from the picture: national confidence. After three years of labor unrest, political turmoil and economic uncertainty, Koreans have lost some of that “anything-Japan-can-do-we-can-do-better” spirit they radiated when they proudly staged the 1988 Summer Olympics.

“We may seem healthy from the outside,” says Kim Suk Won, the young chairman of Ssangyong, one of Korea’s largest conglomerates. “But inside we have blocked-up arteries.”

Arteriosclerosis has begun to set in on this still-young economy.

Korea’s growth last year relied heavily on domestic demand, including a construction and consumer spending boom that few believe can last. Strong sales at home helped hide a fundamental weakening in the nation’s international competitive position. Korea’s trade balance was in the red to the tune of $1.85 billion last year--its first deficit in five years--and the shortfall is expected to grow to nearly $3 billion this year.

Southeast Asian nations such as Thailand and Indonesia are out-competing Korea in key areas such as textiles and athletic shoes. Japanese companies, which once fretted about the grimly determined Koreans being close on their heels, say their neighbors have fallen so far behind that they are hardly worth worrying about.

“We opened the champagne a little too early,” admits Cho Jin-Ho, a scientist at the research and development center of chemicals producer Lucky Ltd. “We need to start focusing on growth again.”

To some extent, this reflects a key problem of developing nations everywhere: rising expectations. It was unrealistic for Korea’s leaders to expect their workers to keep sacrificing for what appeared to be the benefit of their increasingly wealthy employers. Nor was its neighbor Japan likely to look on benignly as Korea kept expanding its market share.

And if the Korean economy today looks a little prematurely gray, it’s hardly a disaster. There is a lot to be said for democracy, a healthy labor movement and a balanced economy less dependent on exports.

But health and balance aren’t what drove the Korean miracle, and stronger consumer spending is bound to be a drag on savings and therefore ultimately on investment. Less investment means Korea will be farther from reaching its ultimate goal: catching up with its former tormentor Japan.

Korea’s economic elite generally agree on what must be done to put the export economy back in gear. The prescriptions are cliches that apply in any economy. Management must make peace with labor. Traditional industries such as textiles must move upscale into areas such as high-fashion apparel. Manufacturers must boost productivity with automation while improving profitability with better, more technologically advanced products.

Government and industry are moving to make those changes. But because Korea has neglected many of these issues for so long, it has a long road to travel. Some woes, such as labor disputes, are deeply rooted in the structure of industry and could be hard to overcome. Others, such as automation and technology development, are being addressed, but it could take years before they are brought to fruition.

Korea’s leaders are still making bullish forecasts. A report put together late last year by a committee of academics, businessmen and government officials sets a target of 4% Korean market share by the year 2000 in a basket of high-tech fields such as microelectronics and biotechnology. Growth in those fields would have to exceed 20% annually to meet the targets. And breaking into high technology is not as easy as building steel mills and shipyards.

Some of the planners may have forgotten: Korea is not the disciplined, authoritarian state it was 10 years ago. The government can no longer pull a few levers to set the economy moving in the right direction.

Since it restored free elections in 1987, the government must respond to a plethora of demands ranging from better housing for workers to subsidies for farmers.

“We would like to spend more money on industry and technology, but there are other demands now,” says Yu Hee Hol, director general of the technology policy office at the Ministry of Science and Technology.

Fine-tuning the economy isn’t so easy either. Worried about the ruling party’s performance in a series of critical elections, the government has followed a loose monetary policy. That helped produce last year’s rapid growth, but it also let the inflation demon out of the bag. Consumer prices are expected to climb 10% this year after remaining in the 3% growth range in the late 1980s.

The government can no longer suppress labor activity and keep wages down by fiat. In 1987, the prohibition against strikes was lifted.

“If you give a child a toy sword, they will imitate warriors and cut down whatever they see,” says Kim of Ssangyong. “When the labor unions got power, they wanted to try it out.”

The number of labor disputes has jumped, and management, in an effort to appease workers, has allowed wages to soar. After growing about 10% through 1987, wages took off, climbing 19.6% in 1988 and 25% in 1989, surpassing wage rates in Taiwan, where per-capita gross national product is far higher. Korean wages rose only 11% last year, but high inflation levels will make it difficult to keep wage increases down this year.

With gradual economic liberalization, the government has also lost control of the chaebol . It nurtured the giant industrial groups such as Daewoo, Samsung, Hyundai and Lucky Goldstar in the 1960s and 1970s to concentrate scarce capital resources and speed economic development.

Once, the conglomerates invested in industries designated by the government. Today the chaebol are speculating in land, investments that hurt worker morale by pushing up rents and forcing housing prices beyond the reach of the average family. The government’s recent efforts to force the groups to sell their unproductive land have had little impact.

Because the chaebol are family-owned, about 1% of the population owns or controls more than 65% of the nation’s private land and the bulk of its productive assets.

“Concentration of wealth in a few families can result in alienation and a sense of exploitation,” worries Lee Kyung Tae, an economist at the Korea Institute for Economics and Technology (KIET), who acts as adviser to Korea’s Ministry of Trade and Industry.

The chaebol’s insistence on having a presence in every industrial sector is also wasting scarce resources, Lee says. In a mindless push to compete with each other in every sector, the chaebol are plowing huge amounts of capital into petrochemical plants, a situation that most experts agree will result in huge overcapacity.

“The authoritarian structure that drove economic growth in the past has crumbled both in the government and in the companies,” says Shinichi Nozoe, a political economist at the Tokyo Institute of Developing Economies.

At the same time, Korea is facing rising pressures from abroad. The United States is pushing Seoul to open its markets, making it more difficult to use the overt protectionist policies that the country has employed to protect and nurture its industry.

When the value of the yen nearly doubled in 1985, Korean industry got a prime opportunity to undercut Japanese industry and to take market share. But Japan has since countered the Korean threat by moving production overseas and investing heavily in automation and new technology.

The comparison with Japan is unfair, argues Yu of the Ministry of Science and Technology. Fifty years ago, when Korea was largely an agrarian nation, “Japan was already producing airplanes, submarines and machine tools. People forget that.”

If Korea is chastened, it has hardly given up the fight. To put it back on the fast track, the government has made its first priority boosting productivity. Korean companies take three times as long to build the same car or stereo system as Japan. That was OK a few years ago when Korean wages were one-fifth of Japan’s; it won’t do now that Korean wages are nearly half of their Japanese counterparts’.

The Economic Planning Board, Korea’s strategic planning agency, has introduced a string of measures--including tax deductions and subsidized loans--to encourage companies to invest in new capital equipment.

Industry is also acutely aware that its profitability depends on moving quickly to restore competitiveness. A weak stock market is holding back spending at many cash-strapped companies. But the firms are shifting their investments to automation rather than expanded capacity.

A boom in imports of machinery to automate production has played a major role in pushing Korea’s trade balance into the red. The trade deficit with Japan this year is expected to reach $9 billion, up from $4 billion in 1988, largely because of a sharp increase in machinery imports.

Textile, shoe and steel companies recognize that they must upgrade their products to stay ahead of their competition in Southeast Asia. After watching shoe exports grow at a 30% rate in 1987 and 1988, only to shrink by 13.7% in 1989, shoemakers scrambled to improve quality with new materials. Korea’s reputation for high-quality shoes helped bring Reebok back as a major customer.

But the ability of name-brand customers such as Reebok to leave at a moment’s notice has underlined the vulnerability of Korean producers who sell under foreign labels.

Some companies are trying to change that.

Daewoo has so many customers that it is forced to make 300 models of television sets. It relies on its customers for designs and market research. Now, says Bae Soon Hoon, who recently became president of Daewoo Electronics after a varied career that included teaching engineering at the Massachusetts Institute of Technology, the company will start doing its own marketing and research.

“It is the right time in Korea’s economic development for us to be developing our own products,” he says.

Samsung has hired famous design companies such as FROG of California to help redesign its televisions and give its products a more upscale look.

One big obstacle to Korea following in Japan’s footsteps as a world-class manufacturer is the owner-managed chaebol . Many of the companies are rife with nepotism and lack a strong sense of employee loyalty. That makes it difficult to implement quality-control circles and boost worker involvement in making production improvements, says Bahk C. W., director of the Korea Productivity Center’s automation program.

Improving quality is a major challenge too. Of 500 companies that the Korean Chamber of Commerce surveyed in February, 164 admitted that they had received notice of quality problems with products they exported in the past year or two. Consumer Reports magazine surveys frequently indicate that Americans put Korean products at the bottom of their quality lists.

Another legacy of the chaebol : a weak small and medium-sized company sector without the capital or technology to develop and manufacture the high-tech components Korean industry needs.

While Japan faced a similar problem of over-concentration in its zaibatsu before World War II, the U.S. Occupation broke up the family-owned conglomerates, blaming them for promoting the war.

“Realistically, we can’t do what General (Douglas) MacArthur did with Japan’s zaibatsu ,” KIET’s Lee says.

Lee predicts that the concentration of wealth will gradually disperse as the owner generation dies, passing on its wealth, and as descendants sell shares of the companies to the public.

If the government can’t cut chaebol to size, it is at least trying to guide them in a different direction. In an effort to get chaebol to specialize in a few key sectors, for example, the government in February loosened lending limits to the big companies on the condition that they use the additional money to build core businesses.

“Our economy needs worldwide, top-ranking companies that can compete with Japanese companies like Sony,” Lee says.

And if the government can’t redistribute wealth, it wants the rich to at least be a bit more discreet about it so the poor won’t feel so deprived. A recent government campaign against luxury goods was as much for that purpose as it may have been to discourage imports.

“When the rich buy luxury products,” says Kim, who is developing his own ski resort, “it creates resentment among the lower class.”

The advantage of the giant chaebol is that they have the ability to seek out overseas markets and handle large development projects. One bright light last year, for example, was the $2.8 billion in exports to the former East Bloc countries, a 41% increase over the year before. Korea has been a major contractor in the Middle East and hopes to win big contracts for the rebuilding of Kuwait. The chaebol also have the resources to commit to research and build costly semiconductor facilities, one of the few high-tech areas in which Korea has been relatively successful.

“The good face of the chaebol is that they have the people and money to develop technology,” says Kwon Moon Yong, head of technology policy for the Economic Planning Board. “The bad face is the concentration of power.”

While Lee of KIET suggests that it could be 1995 before Korea completes its transformation and its trade is in surplus again, he says the critical advances will come when Korea develops its own technological capability.

He adds: “Technology is the only thing that can save Korea.”