New Economic Era Opening in S. Korea, Japan

The economies of South Korea and Japan entered another stage in their transition to open markets last week, promising reforms that will have profound effects on the world economy in the next two to three years.

As a result of changes now underway, both countries will open their economies to foreign investment, trade and commerce far more than they have to date.

They will reshape their companies and industries, providing opportunities for U.S. and European companies and investors. In turn, Korean and Japanese companies will expand abroad, adding to their presence in California and the rest of the United States.

Ultimately, as reforms renew the vigor of these two major economies--South Korea’s is the 11th largest in the world, Japan’s is second largest--Seoul and Tokyo will provide the locomotive force to help the development of the giant economies of China, India and Indonesia.

Meanwhile, all these economies remain in difficulty, although the atmosphere of crisis eased last week.

In South Korea, timely international financing efforts by the U.S. Treasury, the World Bank and leading industrial nations and commercial banks reduced the threat of default by Korean banks and companies.

The widespread fear among government officials and financial experts was that defaults in South Korea would cause a chain reaction, with unnecessary disruptions and layoffs in industry in Europe, Japan and the United States.

In Japan, the government indicated forcefully that it will protect depositors from losses in bank failures. Its actions are reminiscent of the U.S. government setting up the Federal Deposit Insurance Corp. more than 60 years ago.

The Japanese government is also acting to increase capital reserves of banks so that they don’t continue dunning small to medium-sized companies to pay back loans immediately.

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Such emergency actions in both countries mark the beginning of a new era of reforms that will continue into the next century, economists say.

It will be a period of restructuring, with all the difficulties that Americans recall from the 1980s and early ‘90s of widespread layoffs, large companies breaking up and constant merger activity.

Change will not come easily in countries that grew and prospered from economic systems in which government essentially directed funds through state banks to industrial corporations for national purposes.

Such policies lifted Japan’s economy from the devastation of war to the zenith of global industry. And such policies enabled South Korea to transform an economy of agrarian surplus laborers into one of skilled industrial workers with above-average education.

But both economies reached the point of diminishing returns in this decade. Skimpy returns on misdirected investments proved inadequate to pay pensions or even to pay back enormous company borrowings.

Slowly, reluctantly, both countries realized that they had to open their economies internally to independent firms and decision-making and externally to the rigors of outside investment and competition. This year’s global crisis of confidence in Asia made their planned reforms all the more urgent.

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Reforms can’t move fast enough for Yashiro Masamoto, the Tokyo-based chairman of Citicorp Japan. He supports the government’s use of public funds to protect depositors. But he believes that Japanese chief executives could do a lot more to restructure their companies.

“Many companies sit there with overvalued real estate on their balance sheets, waiting for prices to come back,” Masamoto says. “They won’t come back. They should take write-offs and get on with business.” That is what U.S. banks and companies were forced to do with bad loans and unprofitable assets in the 1980s.

Dithering at the top of Japanese companies and government has contributed to pessimism that has driven Japanese stock prices down to unrealistic levels, says Takashi Kiuchi, chief economist of the Long Term Credit Bank of Japan. Kiuchi believes that Japan’s main stock index, the Nikkei, could be 30% higher to reflect the underlying strength of Japan’s main companies.

Such thinking--along with the promise of reforms--is already attracting new foreign investment to Japan. Merrill Lynch announced last week that it will expand its presence in Japan. And other foreign investors are looking, Masamoto reports.

In South Korea, reform is of greater urgency in a smaller economy lacking the breadth and depth of the Japanese and U.S. economies, which are, respectively, about six and 13 times larger. Yet South Korea has a far more developed economy than those of Thailand and Malaysia, two early casualties of the Asian crisis.

South Korea has big, global companies, such familiar names as Hyundai and Daewoo, along with less familiar names such as the Chonggu Group housing construction company that sought court protection from creditors Saturday. The major companies, with operations all over the world, are going to have to restructure. Some of their U.S. subsidiaries, including many in California, will be sold; others will be expanded.

Samsung Group, for example, with $92 billion in worldwide revenue, will have to sell some subsidiaries to reduce its $20 billion in debts and to rationalize its operations.

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But the experience of U.S. companies shows that small firms spun off from large ones often do better on their own. And South Korea’s economy already resembles a beehive with its 2.4 million small and medium-sized companies, and a rising undercurrent of entrepreneurial energy.

The point is that the South Korean economy is not like the economies of Latin America in the 1980s, which remained moribund for a decade because they lacked inner dynamism and the kind of concerted help from rich nations that Asia is now receiving.

The South Korean and Japanese economies face painful transitions in the next couple of years but are likely to come back stronger for the experience. And the ripple effects on the U.S. and world economies will be tremendous but not narrowly predictable.

In the next few years, South Korea and Japan could become a focus of world investment rivaling the U.S. stock market, which has been receiving an inordinate amount of the world’s funds in recent years. But the corresponding benefit for U.S. companies in expanded business in both nations will add to U.S. and global economic growth.

Perhaps most important for the 21st century will be the leading example Japan and South Korea’s open and prospering economies will set for China and India--not the now-discredited “Asian model” of autarkic policies that use trade as an economic weapon, but the open-market model that strives to create a rising tide to lift all boats.