South Korea Gets New Lease on Economic Life

Just short of bankruptcy 17 months ago, South Korea is suddenly bounding ahead with the vigor of a sprinter on steroids.

A jump in VCRs, TVs and other exports heading overseas, more enthusiastic spending by consumers and a rise in the number of companies buying new widget-making equipment boosted the economy by 4.5% in the first quarter, in the process helping it recover nearly everything it had lost since the currency crisis hit 18 months ago.

The nation’s rising fortunes and growing economic appetite are already making themselves felt in California, where exports to South Korea soared 44% in the first quarter and where once-absent South Korean tourists are returning in sizable numbers.

But South Korea has plenty of hurdles yet to clear. Try selling the bullish numbers to the likes of Cho Jae Hyun, the 60-year-old owner of a small clothing store in the heart of Namdaemun market, a commercial hub of Seoul.

“There’s no business these days at all,” he says, dressed in a red golf sweater and blue dress pants. “It’s all gone straight downhill. I don’t see any improvement at all.”

Nor is Cho alone. Many South Koreans express deep skepticism about official statistics, and some hold the dark view that large chunks of the Korean middle class have all but evaporated.

Skepticism on the street is not South Korea’s only problem these days. While signs of economic recovery in this hard-working nation are widely evident, the turnaround here is young and fragile, highly vulnerable to labor unrest, domestic politics, discouragement among foreign investors and more external shocks.

One of the biggest challenges the government of President Kim Dae Jung faces in coming months is to ensure that South Korea’s smaller economic voices--the wage earners, shoe store owners in the Tongdaemun district and metal bashers in back alleys throughout Seoul and Pusan--start feeling that they too are benefiting from the nation’s reform program.

Seo Hwa Ja, who owns one such metal shop with her husband, complains that there simply isn’t enough cash moving through people’s hands to pay for the imported components their company needs to make industrial parts.

“It’s so difficult to get raw materials, and companies are paying later and later,” she says. “I don’t feel like it’s getting any better.”

Yet the government also walks a tightrope. While it wants to engender confidence, it doesn’t want to raise labor’s expectations and trigger new demands for higher wages. That could derail an early recovery--and give the country a black eye with foreign investors who fear a return to protracted labor unrest.

“As the economy gets better, my job gets tougher,” says Kim Yoo Bae, the president’s senior labor and welfare secretary. “Labor unions start making more demands.”

Changing Traditional Ways of Thinking

Further out, the government wants to steer a new economic course that will depend less on steel and shipbuilding and more on information technology.

That means breaking the cozy, decades-long links between politicians and the bloated conglomerates, known as chaebol, that have distorted the economy, a task that won’t be easy. But an even tougher job may be changing traditional ways of thinking among average South Koreans.

While South Korea doesn’t plan to stop pumping out steel or ships any time soon, it has taken to heart criticism abroad that it is overly reliant on borrowed technology, spends too little on research and development and has few industries well positioned to take advantage of an ideas-based society.

“Korea has no technology of its own,” says Kenichi Ohmae, management consultant and author of “The Borderless World.” “Korea minus the chaebol has nothing.”

The government is also trying to weaken South Korea’s distrust of foreigners and its instinct for protectionism. Outsiders--traditionally seen here as great customers abroad--are viewed, somewhat distastefully, as competitors in the home market.

President Kim has tried to set the tone from the top by arguing that foreign-owned businesses in South Korea, with their attendant jobs and technology, are far more important for the nation than a South Korean factory in Europe.

But farther down the chain, the message gets muddled. Foreigners trying to acquire a stake in high-profile sectors such as finance and autos have hit significant turbulence, especially when Koreans discover that global players may not value South Korea’s corporate crown jewels as highly as the home team does.

Last year’s auction of auto maker Kia Motors was not handled well, and Hyundai ultimately jumped in to pay what the Americans at Ford viewed as unrealistic levels. Ford said the winning bid reflected South Korea’s traditional focus on market share over globally accepted returns on investment. Furthermore, the auction process was repeatedly put off amid gripes that the rules weren’t clear.

More recently, the effort of U.S.-based Newbridge Capital Ltd. to acquire Korea First Bank has run into several hiccups amid disagreement with Seoul over the value of the distressed assets and Newbridge’s plans to pare down the bank.

Lee Hun Jai, chairman of the Financial Supervisory Commission, maintains that Newbridge has been unrealistic: “We have to take care of Korea First Bank. If they cut Korea First down to one-half or one-third, the bank can’t do anything.”

But other analysts say the government is merely protecting Korea Inc. If Newbridge disposes too quickly of Korea First’s bad loans, it could hurt two of the bank’s major customers, the Hyundai and Daewoo corporate groups, says Richard Samuelson, branch manager with SBC Warburg Dillon Read, an international investment bank.

Changes in thinking patterns are never easy, particularly in a place like South Korea, which has had to fend off centuries of foreign invasions by more powerful neighbors. For reformers, the challenge is to lock in new, more open attitudes before prosperity encourages people to fall back on old habits.

“Korea needs to guard against complacency to consolidate the gains from the recovery,” the World Bank warned recently in a report.

A key litmus test of South Korea’s willingness to embrace reforms will come next spring when the ruling party and opposition face off in legislative elections.

Voters will face a choice between President Kim’s new ideas and the more traditional policies espoused by the Grand National Party, with its ties to South Korea’s conglomerates, conservative media and old industrial structure.

The increasingly bitter relations between these two camps were very obvious in May when government and opposition legislators literally came to blows on the floor of the parliament over a government reform bill.

Sticking to the Necessities

Still, the signs of recovery are unambiguous. And the government’s hope is that the recent early progress on the financial front--including an upgrade of South Korea’s debt rating by Standard & Poor, a fall in interest rates to 7.5% from a high of 30% and a near doubling of the stock market to 800--will eventually bring an improvement in the one indicator most closely watched by average South Koreans: unemployment.

Although the jobless rate recently fell to 7.2% from 8.1%, analysts say it will take sustained improvement and some minimum level of job security before people really start opening their wallets.

“My husband’s job is still in danger,” says 33-year-old Jang Ji Yong, her infant son cradled around her back in a traditional cloth sling decorated with cartoon ducks.

“We used to spend about [$100] a month on clothes, dining out, some travel. Now it’s almost nothing, just what’s absolutely necessary.”

A BOON FOR THE L.A. AREA

South Korea’s economic recovery is paying dividends in Southern California. C1