About Korea II



Korea: The impossible country_Part II South Korea: One of the world’s great success stories heads to the polls
About Korea II
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Recap_Korea: The impossible country_Part I

Thanks to the dedication and sacrifice that our grandparents’ generation made, South Korea which was one of the poorest countries in the 1950s became an exporter of cutting-edge products, just in half a century.

  • Due to the Japanese occupation and Korean War which happened in early to mid-20th century, South Korea became one of the poorest countries in 1950.
  • When there was no resource, technology, and capital, the government sent miners and nurses to Germany and leveraged their salary as the loan guarantee; this enabled the government to develop light industries for which our grandparents’ generation worked day and night. Exports secured foreign currency.
  • With aid from developed countries in 1970s, South Korea established steel mills, shipbuilding yards, and petrochemical factories. Some companies were also involved in large-scale construction projects in the Middle East. None of this would have been possible without the sacrifice of our grandparents’ generation.
  • In 1980s and 1990s, South Korea developed automobile, chemical, electronics, and semiconductor industries and rapidly grew as an economic power.

However, another major crisis dawned on South Korean economy that was rapidly booming.

3. 1998 - 2014: Another Crisis Faced by the Parents’ Generation and Another Crisis

In 1960s to 1990s, the government, corporations, and people in South Korea were united for the mission to eradicate poverty and to become a developed country. But this process was not without side effects.

  • Dictatorship: since the priority was not to develop democracy but to eradicate poverty and to develop the economy, a dictator and military regimes dominated the government for nearly four decades, holding off political progress.
  • Corruption: in a pursuit of efficiency, only few corporations were chosen to benefit from a close tie with the government.
  • Chaebol (conglomerates): corporations that were given an edge by the government (Samsung, SK, Daewoo, LG, Hyundai, etc) dominated the economy and created Chaebol (conglomerates) For instance, Samsung expanded its business to electronics, automobile, distribution, journalism, construction, petrochemical, insurance, and finance.

In 1990s, even the corporations lacking competency bribed the president to receive funding from the government and expanded their business through reckless investment.

  • Unlike in 1960s to 1970s, in 1980s to 1990s, corporations started to run their business only thanks to their relationship with the government.
  • Corporations bribed the president and politicians and the government pressured the financial institutions so that the corporations can get a loan with undue advantages. The corporations used the loan recklessly. The vicious cycle went on and on.
  • Thus, although the competencies were absent, some companies started to expand their asset by building large factories and building large production facilities and became colossal groups.

However, the Asian Financial Crisis in the mid 1990s became one of the worst crises for Korean businesses.

  • In the mid 1990s, Thai Baht plummeted and American and European investors and financial institutions had a huge loss. Consequently, they started to withdraw their funds and the Southeast Asian market started to collapse.
  • This trend reached South Korea and the American and European financial institutions withdrew their loans to Korean banks instead of extending the terms of loans.
  • In the end, South Korean financial institutions requested corporations to pay back the loan and the companies that were not capable of doing so went bankrupt.
  • In 1997, South Korean government ran out of the foreign exchange reserves and had to request a relief loan to the IMF.

When South Korea was facing such a dire circumstance, South Korean people created another miracle.

  • Gold Donation Movement: due to the Asian Financial Crisis, the price of gold which had been risk free asset skyrocketed. The citizens in South Korea voluntarily started the “Gold Donation Movement” by donating gold to the government. 3.5 million people donated their gold which amounted to be 227 tons (approximately 65g of gold was donated by every household). Most of the donated gold was exported and the gains from it was over 2.2 million dollars. (South Korea borrowed 22 million dollars from the IMF.)
  • Voluntary overtime work and wage freeze: workers dedicated themselves to overcome the crisis by voluntarily working overtime without getting paid for it. Corporations minimized the salary and improved the cost structure.

The government and corporations accepted the IMF’s call for restructuring; corporations’ structure became more transparent and modernized.

  • Pursuit of big deals: IMF advised Korean corporations to focus on a selective array of competent industries. (For instance, Samsung sold Samsung Automobiles to Daewoo; Daewoo sold Daewoo Electronics to Samsung. LG sold semiconductor business to Hyundai and Hyundai took LG’s liabilities.) As a result, Korean corporations invested only on their strengths.  
  • Modernization of management structure: whereas Korean corporations used to be managed by the owners’ families, in this period, they reinforced the role of the board of directors and professional CEOs to ensure the shareholders’ interest.

Ironically through the Asian Financial Crisis (also known as “IMF Crisis” in South Korea), Korean corporations were not killed but made stronger in the global market.

  • Samsung excels in the global electronics, semiconductor, and smartphone market and its market value reached over 200 trillion dollars.
  • LG also grew as a global company encompassing chemical, electronics, electronics, and cutting-edge parts.
  • Hyundai became the top 5 automobile manufacturer, top 5 plant constructor, and top shipbuilding company.
  • GS Group which sprang from LG became a titan in petrochemical, construction, and distribution industry.

4. After 2014: Another Crisis Facing the Current Generation

South Korean manufacturers are facing another crisis due to high-tech companies from Silicon Valley and Chinese companies growing rapidly.

  • Samsung and LG’s market dominance is challenged by Apple and Google that are dominating smartphone SW market.
  • Hyundai which had been focussing on automobiles powered by gasoline are finding it difficult to keep up with the recent electric and hybrid automobile manufacturers.
  • Hyundai Heavy Industries that had been investing in offshore plants for developing deepwater gas and oil are left behind the trend of solar energy and shale gas and consequent low price of oil.
  • Since the oil price has gone down, there has been less projects for South Korean construction companies to build oil and gas plants in the Middle East.
  • Chinese corporations are growing exponentially in all of these industries, competing against South Korean corporations.

In the midst of all this, politics is in a hot mess; former President Lee Myungbak wasted the national coffers and President Park Geunhye is accused of corruptions.

  • During the former President Lee Myungbak’s term, more than 100 trillion won was wasted on ill-considered policies such as Development of Four Rivers. This interrupted the momentum for economic growth.
  • The current president, Park Geunhye, has been accused of giving favors to her close people through inappropriate ways and has lost legitimate control over the executive branch.

South Korean people are not shying away from this crisis.

  • More than 200,000 people peacefully demonstrated against the current regime’s corruption last week.
  • Numerous startups are working day and night to provide outstanding service, keeping up with global management standards.

Will South Korea reenact the glory handed down by the grandparents’ and parents’ generations? Will this be a prologue for the new chapter of economic growth?

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