Each year in September, the Economist holds a conference on the Korea economy (a part of its Bellwether series on Asian economies). They invite me to come, and then I try to write up my thoughts on it in the JoongAng Daily as an op-ed. Each year, unfortunately, we seem to argue about the same things – a proper, untweaked float of the won, and the openness of the Korean economy to foreign products and owners. Here are my thoughts from 2010 and 2011. I was so busy in the last few months on this site with the US election and other stuff, that I didn’t get a chance to reprint the JAI op-ed. But I like it, so here is the link, and here is the text itself:
“Last week the Economist magazine held its annual conference on Korea’s economy. This series is rapidly becoming the most important regular discussion in Korea for Korea’s foreign investors. Last year in these pages, I was critical of the Korean speakers’ response to foreign concerns. This year was an improvement. The finance minister particularly fielded a tough question about foreign investors’ rights in Korea in the wake of the Lone Star debacle. To his credit, he admitted what many already know from that case – that the Korean public is deeply ambivalent about substantial foreign profit-taking and ownership of major Korean assets.
No less than the Hyundai Research Institute noted earlier this year that Korea has lost perhaps 660,000 jobs due to foreigners’ wariness of investing in Korea. Koreans may dislike major foreign penetration of banking and industry, but that disdain clearly comes with a cost in lost employment. Korea’s labor force participation rate is around 24 million or 50% of the native population. Hence, if Hyundai’s numbers are correct, greater foreign investment could knock over two percent off Korea’s unemployment rate – a fairly substantial jobs gain. In the global investment community, this handicap is known as the ‘Korea Discount’ – the price in local populism and negative media attention that foreigners must pay if they operate at too great a profit in Korea. To the great credit of the government, the finance minister was willing to address this and admit that Koreans are still learning to welcome foreign firms.
While the details of Lone Star have been endlessly rehearsed, it is worth noting the broader concerns the case raises. Lone Star alleges that it faced erratic, personalized regulation, politicized government intervention, an inflammatory local media, and widespread public opinion antipathy that resulted in street demonstrations. Yet Lone Star had done what many global portfolio investors do – provided a capital injection to a struggling firm at some risk to itself. If the Korean Exchange Bank had collapsed, Lone Star would have lost a substantial amount of money. Because KEB rebounded with Lone Star capital, KEB’s many employees retained their jobs, an upside rarely admitted in the Korean debate.
We should not forget that KEB was headed toward bankruptcy, a mess the Korean government was desperate to avoid. Had the Korean government wanted to rescue KEB without foreign assistance, it might have nationalized the bank. It wisely chose not to. That Lone Star then turned a substantial profit is not a flaw – it signals KEB returned to health, and profit of course is whole point of investment. There was a clear risk that the investment would fail, another point widely unmentioned here. Media figures, and speakers at this conference, insisted that Lone Star was a ‘speculator,’ because it bought at a low price and sold at a high one (meoktwi). But this is precisely what all global investors seek, including Korean ones, such as the Korean Pension Service. Like any investment portfolio in the world, the whole point is to buy low and sell high, thereby maximizing returns. Clearly the Korean regulators knew this beforehand, and it is important that this basic principle be defended by the Korean government, both in fairness to foreigners who should not lose their WTO-guaranteed rights here, and to insure a continuing flow of job-creating foreign investment into Korea.
All this raises a crucial issue in the future for Korea, long after Lone Star is forgotten. Is the Korean public prepared to accept not just foreign job creation in Korea – which everyone welcomes – but consequent foreign ownership and profit-taking? My own sense is, not really. My impression, again and again, whether from teaching students, attending academic conferences, or simply reading the Korean business media, is that Koreans do not actually want a major foreign presence in their economy beyond the employment benefit. The presence of foreigners in chaebol ownership structures, e.g., is almost nil.
Job creation from foreign investment is obviously welcome, but the resultant foreign ownership of Korean assets and profit-making off of these assets remains suspect. My students thrill to stories of Korean exports. The Arirang TV network, created mainly for resident foreigners such as myself, bombards the viewer with stories about this or that successful Korean product conquering the world – LED TVs, smartphones, k-pop. Each month the media breathlessly detail Korea’s export surplus.
Yet there is a flipside that is almost never reported. If Korea always runs a trade surplus, as it has since the Asian financial crisis, then its export targets must mathematically always run a deficit. This is unsustainable of course, generating the much-discussed imbalances (similar to Germany’s relationship with the euro-zone periphery). If Korea always exports more than it imports, this is essentially predatory on its trading partners who must see capital permanently leak away to Korea (Korea’s 300+ billion USD reserves). This should be offset by a rising won – as Korea’s exports rise in desirability, so should the price of its currency. But this does not happen, because the Bank of Korea regularly intervenes, likely at the behest of chaebol mega-exporters, to keep the currency undervalued, a point made repeatedly at the Economist conference and by the IMF.
In short, job creation from foreign investment is welcomed, but foreign ownership, profit off-shoring, a proper currency float, and imports are not. This hypocritical and contradictory attitude is not unusual; the US Democratic National Convention last week was a similarly impossible, mercantilist mix economic nationalism and trade promotion. But Korea is vastly more trade-dependent than the US, and the nationalist backlash in the media and public opinion stronger. This may be stem from Koreans’ deep belief that they are bullied by larger states and have only their tiny sliver of land – hence it must be defended at all costs. But Koreans should also realize that economic nationalism in the globalization era comes at a cost of lost jobs and regular trade friction, a price all the higher in an economy as trade-dependent as Korea.”