Economic Reform and Business Opportunities in Korea

By You Jong-Keun (Governor of South Korea)

Ladies and gentlemen, and distinguished guests! First, I would like to thank you for your
continued interest in Korea and our ongoing efforts to get our economy back on the track of
economic growth and prosperity. United States is the number one trade partner to Korea and
American firms have made significant contributions to the recovery not only in Korea but
throughout the Asia-Pacific region. I have come here today to encourage your further
participation in the recovery of the Korean economy by briefing you on Economic Reforms
and Business Opportunities in Korea.

1. Risk and Reality

It has now been over a year since the financial crisis first swept across the Asia-Pacific region,
bringing with it the whirlwind of economic instability and uncertainty that has since spread
across global markets. For investors, the question of how and when the crisis will affect their
investments has only added to the sense of urgency and sent many in search of so-called
financial "safe havens."

In Korea, the answers came swiftly and painfully back in November of 1997 when the country
was forced to turn to the IMF for a US$58 billion economic rescue package. The ramifications
of this crisis have been profound, both in terms of investor confidence and direct investment
in Korea. Through 1998, foreign investors remain wary of assuming the risk in an economy in
which they saw 1 in 10 businesses go bankrupt through the first half of the year.

But, as all investors are keenly aware, nothing is won without risk. Are there risks to investing
in Korea? Yes. Are those risks manageable and foreseeable? Absolutely. Our world is one
undergoing fundamental change. From the globalization of world markets to the technological
innovations transforming the way we live and do business, risk and change may be the only
constants.

But despite their unwanted effects, I do believe that the consequences of these changes are
positive on balance. I also believe that Korea is uniquely positioned to benefit from, and
capitalize on these changes to emerge as a fundamentally stronger, sounder nation. So for
the investor with true foresight, I say that Korea is, in fact, the diamond in Asia's economic
rough.

The basis for my beliefs is rooted in the sweeping reforms now being instituted by the
administration of President Kim Dae-jung. In a crucial break from the past, Korea now
adheres to the principles of an open and free market system and is committed to promoting
increased competition and fair play. Recent events in some Asian countries have raised
speculation about the possibility of a return interventionism. But in Korea, it will our country's
commitment to reform and the free market, not the economic machinations of government,
that will lead the return to economic growth, and usher in a new era of democracy and
prosperity.

But now, let me discuss what the Korean government is currently doing to reform the
economy, and how these reforms will provide new business opportunities for foreign investors
in Korea.

2. Progress of Current Reforms

Over the last thirty years or so, the remarkable growth of the Korean economy has largely
owed to an export-driven economic development plan, managed by a tightly interconnected
circle of government, banks and big business. The system worked so well, in fact, that
investors once labeled the country, "Korea Inc." But late last year, Korea received its reality
check--and the bill was in excess of $150 billion.

Bringing an end to the old ways of "Korea Inc." first means the elimination of the corrupt and
collusive links between the government, banks and the country's giant, debt-financed
conglomerates, known as the chaebol. By holding itself wholly accountable to the people, the
new administration is setting the example for reform. But in order to truly change the system,
we also need fundamental changes in the behavior of a highly entrenched corporate
bureaucracy as well as Korea's famously unwieldy labor unions. These are formidable tasks,
and have forced Korea to not only change its paradigm for political and economic
management, but also the basic rules of the economic game.

First and foremost, Korea is redefining the role of the government. In its previous stage of
development, Korea believed that the government could complement the functioning of the
free market. In reality, however, the government ruled over the market with an arbitrary hand,
protected big business with various entry and exit barriers, and blocked both the free flow of
foreign capital as well as foreign goods and services into the economy. But today, the role of
the government is being dramatically reduced. Bloated bureaucracies are being streamlined;
deregulation is being pursued vigorously; and government-invested companies are to be
privatized. By the end of the year, the number of regulations affecting economic activity is
expected to be reduced by half.

Secondly, Korea is taking steps to bring both accounting methods and management
transparency up to internationally recognized standards. For investors, the lack of
transparency remains one of the major stumbling blocks to investing in Korea. But now, the
era of unaccountable management is over. In the private sector, directors now find
themselves legally accountable for the management of their firms, as government-led
measures continue to strengthen the rights and voices of minority shareholders. To improve
financial management and accounting, the government will make consolidated financial
statements mandatory and prohibit cross-debt guarantees at the country's largest business
groups. These efforts are all part of the government's drive to establish fair and transparent
"rules of the game," to level the playing field for all the players in the Korean market.

3. Foreign Investment--An Engine for Growth

As we all know, reform is not built in a day nor completed in one giant step. It must be a
steadfast and continuous process. And in the case of Korea's current reforms, foreign
investment will play a greater role than ever before.

Investment advisors are fond of saying "foreign investment cannot be arranged; it must be
fought for." The fight in Korea will not only be to attract foreign investment, but to put an end
to a system that nurtured monopoly and oligopoly at the expense of free and fair competition.
In line with their major restructuring programs, Korean companies must look to form strategic,
synergistic alliances with foreign firms that combine their experience and know-how with the
technological and creative strengths of their foreign counterparts. These alliances, such as
those between GE and Korean Air, Bell Canada International and Hansol PCS, or the $1
billion joint venture between Abitibi Incorporated and Hansol Pulp & Paper, are good
examples of how the companies involved can promote mutual benefits, and boost their
regional and international market presences.

Why Korea? While skeptics of Korea's prospects for economic recovery continue to dwell on
the negative, allow me to shed some light on what has been, and will be, done to return the
country to the economic fore and to prepare its workers and companies to compete in the
coming 21st century economy.
First, let me discuss Korea's controversial labor situation. The skeptics will say that Korean
unions are and will remain steadfastly militant. But the reality is that the labor environment in
Korea is undergoing very real and permanent change. In February, the Tripartite Commission
of government, labor and management signed the landmark resolution on layoffs that paved
the way for comprehensive labor market reform. And while public acceptance may be slow,
the recognition of their necessity grows daily. In the much maligned Hyundai Motors strike
settlement, the company managed to pare down employment by more than ten thousand, in
spite of the fact that the number of formal layoffs was reduced to 277.

And in order to help ease the pain of this transition, the government is now building Korea's
first true social safety net. Indeed, past governments lacked the foresight to see beyond the
years of double-digit growth and lifetime employment. But now, with unemployment rolls
exceeding 7% of the labor force, the government has pledged to aid those displaced during
the crisis while working to create a healthier, stronger economy and, ultimately, new and
better jobs and opportunities for everyone.

Secondly, Korea continues to have a sizable domestic economy. Before the crisis it was the
eleventh largest economy in the world and it remains an economy with a large component of
domestic demand. Korea is also a neighbor to the world's second-largest economy in Japan
and the world's fastest growing market in China. With such strategic location, foreign
investors in Korea will not only get one of the most economically profitable and politically
convenient "windows on the world," but also an ideal place to base their Asia-Pacific
operations.

In addition to a strong workforce, Korea also boats a well-developed industrial base that can
complement the operations of foreign investors. Korea is home to many industrial parts and
components companies, a large steel production sector, and a well-developed and efficient
construction industry. By combining themselves with companies in these sectors, foreign
investors can increase their presence throughout the region and boost their competitiveness
throughout the world.

Koreans, in both the public and private sectors, now welcome foreign investment with open
arms. Korean firms are serious in their desire to develop harmonious relations with foreign
firms and have much such efforts a key part of their respective restructuring programs. They
recognize the fact that foreign capital can and will play an important role in the recovery of the
economy, and are actively seeking foreign partners in a number of fields including
manufacturing, services, and real estate management.
The government is also going to great lengths to facilitate this process. The Korea Investment
Service Center has been established to assist foreign investors by providing advice on
everything from tax breaks to financial incentives, and assists foreign firms with their search
to find and purchase business locations. In addition, the government has recently enacted
Foreign Investment Promotion Act to remove obstacles to foreign investors and provide
additional tax exemptions.

4. Korea: Towards a Brighter Future

The Korean government's efforts to overcome the current economic difficulties have already
started to bear fruit. More than anything else, the foreign exchange market has made a
remarkable turnaround, and remained relatively stable, even in the midst of the recent
worldwide instability. Usable foreign reserves, which stood at $3.8 billion on the day Kim
Dae-jung was elected President last December, have topped $43 billion as of middle of
September, partly boosted by a record current account surplus that reached $25.5 billion
through the end of July. In addition, stability in the foreign exchange market has allowed a
significant reduction in interest rates. For example, measured by the yield on the 3-year
corporate bond, the benchmark rate has come down from 30% several months ago to well
below 13% today.

Inward foreign direct investment has been almost restored to its pre-crisis level, totalling $4.1
billion from January to August of this year. A number of deals have already been closed,
including the US$260 million investment by BCI and AIG in Hansol PCS; Bowater Paper
Corporation's purchase of paper production operations from the Halla Group for $240 million;
U.S.-based Motorola Corporation's announcement of a planned $300 million increase in its
investment in Korea; the purchase of Samsung Heavy Industries construction equipment
manufacturing division by Sweden's Volvo Corporation; and Germany's BASF AG, which has
acquired several divisions of Korean manufacturers, including its US$600 million acquisition
of Daesang's lysine unit.

Despite this progress, Korea still has many difficulties to overcome. In the second quarter of
this year, GDP growth contracted at an annual rate of 6.6%, while unemployment figures
soared to 7.6% of the total labor force, or 1.65 million people in July. At financial institutions,
pressure to improve their own financial situation in addition to increased market risk have
forced them to strictly curtail lending, thus exacerbating an already severe credit crunch.
Recently, the Korean government decided to take expansionary measures to prevent a
further deterioration of the Korean economy. These measures are intended to provide a
favorable environment for the reform process and are being taken in close consultation with
the IMF.

5. Conclusion

In The Road to Serfdom (1944), the Nobel laureate F.A. Hayek said that "If we are to build a
better world, we must have the courage to make a new start." In Korea, that new start has
begun under the leadership of President Kim Dae-jung. In his national address to celebrate
the Republic of Korea's 50th Anniversary, he urged the Korean people to come together to
overcome the current economic crisis and help build a new era of democracy and prosperity
in our country.

To do so, he said, "Koreans must be resolute in their commitment to economic restructuring

and comprehensive national reform." The Korean people and government have a clear
understanding that there is no way out, except to continue reform. The prudent investor
weights risk against benefit. As prudent investors, I believe you will all recognize the great
potential that lies waiting to be realized in Korea. Thank you.

Source: http://www.asiasociety.org/ 09/25/1998