Troubled Tiger

...When auto workers from Daewoo, Kia, and Asia Motors left production lines this past December, it wasn't because they wanted more money or had any complaint about working conditions...

...Today the bloom is coming off the Korean rose, as an economy built along the Japanese model is beginning to show some nasty Japanese-style cracks...

...The story of modern Korea began in 1961, when a 43-year-old general named Park Chung Hee TROUBLED TIGER: BUSINESSMEN, BUREAUCRATS AND GENERALS IN SOUTH KOREA Mark Clifford M. E. Sharpel357 pages/$55...

...even the biggest companies occasionally find themselves resorting to the "curb market," an unregulated lending market (tolerated by the government) that has sprung up in response to an everpresent demand for scarce capital...

...They were protesting the government's decision to allow the Samsung group to move into the car-manufacturing business, the argument being that this would only weaken existing companies...

...One union leader shaved his head after Clifford refused to give in to a demand that the club inform the union of all its suppliers...

...Not only is this a sure prescription for scandal, it also leaves the Korean economy dominated by unwieldy business behemoths at a time when the global market is putting a premium on lean and mean...

...By the 1980s an awestruck American press was hailing Korea as the wave of the future, and a 1992 Fortune cover declared that "South Korea's quest to be the next Japan seems right on schedule...

...The point is Milton Friedman 101: if regulations are such that businessmen need to go to politicians for help, payoffs will follow...

...The scandal of "Madame" Chang and "General" Lee, which rocked the government of Chun Doo Huan, is instructive...

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...And nowhere is he more persuasive than on the issue of corruption...

...Eventually the two were atop a pyramid amounting to some 13 percent of all money in circulation, and the scheme came crashing down when a company with a small amount of promissory notes outstanding complained to authorities that its notes were still in circulation even though it had paid up...

...Given North Korea's track 60 The American Spectator March 1995 record, moreover (Park saw his wife murdered in an assassination attempt on him, and half of Chun's cabinet was .blown up by a North Korean bomb in Rangoon), a little paranoia seems to me the height of prudence...

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...For all the hoopla about the Korean miracle, its success in key areas has had more in common with Lee Iacocca than Adam Smith...

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...How did Korea do what it did...

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...Nobody tells this story better than Mark Clifford, a colleague of mine at the Far Eastern Economic Review who covered Korea for the magazine from 1987 to 1992, a period in which the country played host to successful Summer Olympics, enjoyed mostly double-digit economic growth, and moved from dictatorship to democracy...

...And could it be done again today...

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...This is not a problem unique to Korea...

...Competition in the export market forced upon the South Korean firms a discipline without which they would have grown as fat and unresponsive as any socialist behemoth...

...As for Chun Doo Huan, what I find remarkable is not how his family used his power to enrich itself, but how well Chun, a poor country boy who climbed up through the military, managed the economic dynamo over which he presided despite having no training or background for it...

...guided capitalism...

...On its own terms this arrangement worked well, and one result was the impressive panorama of an industrial power-gleaming factories, stunning hirises, and gargantuan public worksthat makes Korea so attractive to foreigners seeking a model for development...

...ambassador Don Gregg asked for a copy of these guidelines, the official refused to hand them over, on the grounds that companies would only avoid them if they knew what they were...

...The same official was later promoted to director of the Health Ministry's division of international cooperation...

...those that did badly were simply handed over to someone who was doing better...

...Nor was it a question of luck that it worked for them and not their brothers in the North-or, for that matter, that it worked in Taiwan and not in China...

...Financial repression was an invitation for fraud, because anyone who could extract money from banks at below-market interest rates, as Chang and Lee did, was guaranteed a profit...

...J n most parts of the world, workers strike when they have a beef with their employers...

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...In his youth Park had flirted with Communism, but in office he would exhibit an almost religious passion for economic growth, and he was smart enough to realize that he needed foreign capital and know-how to make it happen...

...That may be true in more ways than they know, especially with Japan finally showing the strain of all its inefficiencies...

...Unfortunately, rather than simply open up the economy to foreign competition, as Clifford advocates, a move that would swiftly force the chaebol to concentrate on their areas of strength, the Kim government has tried to regulate them into line...

...Like most Koreans his age, Park had grown up with the Japanese and had imbibed some early lessons...

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...This market was made up of people like Chang and Lee, who used their connections (both real and implied) to the Chun government to borrow scarce money and then relend it themselves at higher rates, using as security a promissory note for an amount higher than the loan (which itself might be sold on a secondary market...

...That was too inefficient...

...What the striking autoworkers know is that the same goes for companies that succeed...

...There was thus a natural disposition towards things big, and the chaebol-giant business conglomerates modeled on the Japanese zaibatsu-flourished and grew bigger...

...Not least of his genius was his ability to instill the same single-minded devotion in his people...

...In Korea Inc., government permission to launch an enterprise inevitably implies a government commitment to subsidize it through cheap credit and preferential treatment...

...Our conversations over the office coffee pot lead me to suspect that his keen .appreciation for Korea's peculiar economic arrangements may owe as much to a stint as president of the Seoul Correspondents Club, where little things-like trying to import cheese and beef for American cheeseburgers-yielded a highly personal tutorial in the nature of the Korean bureaucracy and Korean labor relations...

...The real question worth debating-whether Korea would in fact have developed otherwise-is not addressed...

...Yet Clifford moves beyond the usual sermons to locate the source of these scandals in Korea Inc...

...The difference was the international market...

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...59 The American Spectator March 1995 came to power in a military coup...

...This, after all, is a country where officials impounded a quarter million dollars' worth of Snickers and Skittles candy at Pusan on the grounds it did not meet Korean guidelines...

...From the time of Park Chung Hee, the Korean government has followed a predictable pattern: solemn vows to root out corruption are followed by new regulations and purges, which are in turn followed by scandal and attempts to blame everything on one's predecessors...

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...At every juncture Clifford makes clear his distaste for the politics of Chun and Park and is further given to citing their "paranoia" about North Korea...

...The government decided who would grow and who would not, exerting control through taxes and especially credit...

...In the process of making this point, the workers cost their own companies some $152 million in lost sales...

...In other words, if you want clean government, get lean government...

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...J t is here that Clifford's work stands well above the pack, if only because he understands the structural incentives prevailing in Korea...

...It is a lesson South Koreans would do better to take to heart, rather than have it forced upon them by a far more integrated and unforgiving world economy...

...That is the Korean way, and it must be admitted that over the course of a generation it has made a war-ravaged backwater into the world's twelfth-largest trading power...

...In this process, the how is as important as the what...

...The Madame Chang affair, writes Clifford, underscored just how primitive Korea's financial system was and how easily it could be manipulated...

...Until his assassination in 1979, Clifford writes, Park "was the nation's schoolmaster and its chief economist...

...But it was a love-hate relationship, and, as Clifford reports, though Park knew he needed business to develop, he was "always suspicious" and exerted control "through loans, periodic tax investigations, and anticorruption campaigns...

...Big companies were rarely allowed to fail...

...No matter how many advantages Korea lavished on its favorite horses, it did not control the race, and Park was wise enough to know it...

...Japan today finds itself with similar problems on a larger scale, and among the many mistakes the press makes is looking to the politicians, even, the new ones, for answers...

...At a time when the experts had written his country off (the New York Times thought Burma's Ne Win had the right idea), Park envisioned a Korea covered with smokestacks, car factories, and steel plants, not least because it would help make his nation less dependent on others for, its defense needs...

...The politicians have yet to understand that they themselves are more the symptom than the cause of change today...

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...Although President Kim Young Sam's government has made some highly publicized efforts to bring the chaebol to heel, his preference for doing this through regulation rather than competition only feeds the bureaucracy...

...In South Korea, they do things a little differently...

...It is almost effortless...

...Naturally he has only driven the bad guys further underground and invited more corruption...

...The pen appears to float across the papereven your thought, seem to flow more iireiy...

...This is how the Daewoo Group, which started out in textiles, found itself with a machinery company, an auto venture, and finally a shipyard...

...However well Korea's state capitalism may have worked in the past, it has carried frightful opportunity and efficiency costs, one reason why among Asia's "Four Tigers" the South Korean per capita income of $6,790 remains less than half that of its counterparts in Hong Kong and Singapore and barely two-thirds that of Taiwan...

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...No one covering Korea believed that the prosecution of Hyundai founder Chung Ju Yung was unrelated to his decision to challenge Kim Young Sam for the presidency...

...Such quibbles as I have are the standard reactionary ones and run across political lines...

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...Yet, however impressive the sight of a modern manufacturing plant, it may be far less efficient than the cottage industries favored by Chinese entrepreneurs...

...As Clifford points out, companies that got with the program could count on generous rewards "provided-and this was critical-that they remained competitive in overseas markets...

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...The danger in Korea, suggests Clifford, is that it has been "seduced by a taste of success into thinking that it can choose the pace at which it liberalizes its economy without sacrificing its international competitiveness...

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...Yet the workers had logic on their side...

...Yet the Korean story remains of pivotal importance if only because it remains the most talked-about model for other developing nations...

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...All this is duly reported by a foreign press that grows ever more cynical...

...19.95 paper reviewed by WILLIAM MCGURN William McGurn is senior editor of the Far Eastern Economic Review...

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...Clifford documents all this well, with just enough political and historical background to keep the book from becoming inside baseball for Korea junkies...

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...And in a home economy that remains highly competitive for domestic manufacturers-of the 200,000 cars sold in Korea in 1994, fewer than 2,000 were foreign-the striking Daewoo, Kia, and Asia Motor auto workers well understood that the government's decision to allow Samsung to make cars in fact meant the government .would now be using their tax dollars to finance a competitor...

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...In capital-starved Korea, cash is almost always a problem, especially for companies without access to cheap government loans...

...In Troubled Tiger, Mark Clifford notes that when big companies go bankrupt in Korea, "it is not only because of economic problems...

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...The Koreans called this...

...After he stepped down from the presidency, Chun found himself reviled by the same people who would have licked his boots months earlier, and Clifford notes that during the almost surreal hearings that followed, "It was hard to remember that the economy had doubled in size during his eight years in power...

...Today President Kim Young Sam, a product of the opposition, promises a New Deal for Koreans, and he at least seems to have understood that cutting the chaebol down to size and internationalizing the economy will be an essential part of any reform...

...Decades of financial repression had left smaller companies starved for the capital they needed to grow and had opened up profitable opportunities for anyone with money to lend...

...The downside of the government's policy of favoritism is a deep public distrust of the very business-that built Korea in the first place...