Good Economic Sign in Seoul

Stock markets across Southeast Asia have been rebounding, raising hopes that the region’s stricken economies are on the mend. But in the short term the gyrating markets are hardly reliable indicators. The real sign of change is coming from South Korea, where Daewoo, an industrial behemoth once considered too big to fail, is being dismantled by its creditors and sold for scrap.

Powerful, inefficient conglomerates like Daewoo have dominated South Korea’s economy for decades. The recognition that they have outlived their usefulness is a welcome signal that radical economic restructuring is taking place.

The country’s second-largest chaebol--the Korean word for the spidery, sprawling industrial giants--Daewoo has been on the ropes for months, trying to fend off its creditors. In three separate restructuring plans this year, the management promised to spin off some operations to save the conglomerate from bankruptcy. But with each plan, the creditors’ skepticism grew.

The breakthrough came Tuesday when Daewoo agreed to break apart and sell off 16 of its 22 companies, leaving only its automotive business intact. Just a day earlier, South Korean President Kim Dae Jung delivered a tough speech telling all the chaebols--including Hyundai, Samsung, LG and SK--to reorganize.

The sell-off will raise nowhere near the $50 billion that Daewoo owes its creditors, and a good chunk of the cost of restructuring will come out of the taxpayers’ pockets. The conglomerate, which accounted for 17% of South Korea’s gross domestic product, has been feeding at the public trough for years, and the hungrier it got the more inefficient it became.

Like all of the nation’s corporate powerhouses, Daewoo flourished on cheap labor, government backing and economic power that stifled competition.

Daewoo’s case has shattered the notion that the chaebols are invincible. Its breakup is the most convincing sign yet that Seoul has the courage to undertake reforms once considered unthinkable.