December 17, 2012 7:27 pm
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South Korea: In search of a new model
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By Simon Mundy in Seoul
The presidential candidates are vowing to help the poor and curb favours to big business
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©AP
South Korea’s presidential candidates – Park Geun-hye, left, and Moon Jae-in, right – are closely matched in opinion polls
By a plot of vacant land in Seoul’s glamorous district of Gangnam, made famous this year by a global pop hit, a cluster of elderly homeless people stand in quiet protest. For 30 years the group sheltered under a bridge, on the south bank of the Han river that courses through the South Korean capital. They subsisted by retrieving discarded clothes from rubbish tips and exchanging them for money or food.
Ordered this summer to clear their camp for safety reasons, the community is refusing to move into state-provided homes, arguing that they cannot afford the rent. “We’ve demanded nothing from the government, ever,” says Kim Duk-ja, 74. “They promise welfare at every election time. But what about us?”
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South Korea’s rise from one of the world’s poorest countries to one of the richest, in less than half a century, has few parallels in modern history. But Ms Kim’s complaint reflects a shift in public opinion that has become increasingly prominent before Wednesday’s presidential election, as attention focuses on those left behind by the nation’s rapid ascent.
Five years ago, the conservative businessman Lee Myung-bak won the presidency by promising to spur growth through tax cuts and deregulation – only for the global credit crisis to undermine his ambitious economic forecasts. Now, popular enthusiasm for growth has given way to calls for “economic democracy” and for restrictions on the power of the family-controlled chaebol conglomerates that dominate business.
Both of the leading presidential candidates – Park Geun-hye of the ruling New Frontier party and Moon Jae-in of the liberal Democratic United party – are promising to build a social safety net befitting the country’s prosperity and to provide equitable conditions for small businesses by stamping out unfair practices by the chaebol. The debate has prompted deep reflection on the flaws of an economic model that fired decades of galloping growth and on whether it is time to introduce policies less accommodating toward the exporters that drove the nation’s rise.
Desperately poor in the early 1960s, South Korea was still reeling from the devastation of the Korean war and faced the threat of another invasion by the then more prosperous North. A state-backed programme of export-focused industrialisation launched more than three decades of double-digit annual growth, propelling the country into the ranks of advanced nations. Today it boasts a $1tn economy while its citizens enjoy greater purchasing power than those of Italy and New Zealand.
Yet beneath that growth lurk more troubling statistics. Economic inequality has been steadily increasing, with 15 per cent of South Koreans living on less than half the median income, according to the most recent figures from the OECD. Elderly people without a family to fall back on, such as the homeless Ms Kim, can hope for a state pension worth a fraction of the minimum wage. About a fifth of young graduates are unemployed.
The campaigns of both Mr Moon and Ms Park have focused on tackling such problems and building a fairer society. But despite the broad policy overlap, their personal backgrounds contrast starkly, putting them on opposing sides of the struggle between the former military regime and the pro-democracy activists who opposed it. Ms Park, who has a wafer-thin lead in opinion polls, is the daughter of Park Chung-hee, the army strongman who ruled in increasingly dictatorial style for 18 years until 1979. Mr Moon was imprisoned as a student for protesting against the Park government.
In principle, the popular desire for reform should favour the opposition candidate, whose outgoing public image contrasts with Ms Park’s more reserved persona. But while the association with her father is enough to turn some voters against Ms Park, others respect the unmarried 60-year-old for her service to the nation, including 14 years as a lawmaker – or indeed fondly remember her father’s transformative industrial policy.
Political analysts say the two have contrasting attitudes to North Korea, which has shown no sign of taking a friendlier stance under its new leader, Kim Jong-eun, and successfully launched a long-range rocket a week before the election. Mr Moon – who helped implement a pro-engagement “Sunshine Policy” as chief of staff to the late President Roh Moo-hyun – would seek a summit in Pyongyang within months of taking office. Ms Park is also keen to resume negotiations but warns against “talks for the sake of talks” and says that significant economic assistance would require “progress in denuclearisation”.
Despite a widespread desire for a rethink on relations with the North, this election is being fought primarily on domestic issues. Yet while both candidates are promising to overhaul the economic model fostered by General Park, they must convince the many disillusioned voters who question their chances of achieving reform in the face of powerful vested interests – and who say they have heard such pledges before.
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Having been weaned on state-provided credit, the manufacturers continue to benefit from state policy. Seoul provides cut-price electricity to industry, while trade rivals also accuse Korea of boosting exporters by intervening to slow any sharp currency appreciation. Critics argue that the biggest chaebol enjoy an unhealthy degree of political influence. The chairmen of South Korea’s three biggest conglomerates – Samsung, Hyundai and SK Group – have all been convicted of fraud in recent years. But the three men, along with numerous other businessmen, were granted presidential pardons by Mr Lee, who cited their economic importance.
“Korea made it by using this government-business nexus,” says Shim Jae-hoon, an independent political commentator. “[But] the chaebol have become a monster overshadowing the political power that created it.”
Some perceived a tougher approach in August when the chairman of Hanwha, one of the larger chaebol, was given a four-year jail sentence for fraud, rather than the suspended sentence that several other bosses had received. And the presidential candidates are promising to crack down even harder on malpractice.
Both have vowed to abandon Mr Lee’s liberal use of the presidential pardon. Ms Park promises to make it easier to bring suits against the chaebol for anti-competitive behaviour, and to check their preferential access to funding by restricting their investment in banks. Mr Moon would boost the rights of minority shareholders, and gradually eliminate the complex webs of “circular” shareholdings between subsidiaries that allow founding families of chaebol to maintain control of the groups with relatively small equity holdings.
The mooted changes are intended to strengthen the accountability of chairmen who typically encounter little internal resistance to their strategic decisions, and divide senior executive roles among their relatives. Stronger checks and balances would be welcomed by many foreign investors, who fret about the potential for an unconstrained leader to destroy shareholder value with rash decisions, says Mark Mobius, executive chairman of Templeton Emerging Markets. Such corporate governance concerns, he adds, are a principal reason why leading shares are cheap, by international standards, relative to their profits: the so-called “Korea discount”.
The Federation of Korean Industries, a lobby group for big businesses, warns that policy makers should take care not to undermine the conglomerates that remain central to the economy. “I think it is more desirable to promote policies to support ordinary people or subsidise SMEs, rather than ... require reforms in corporate governance,” says Lee Seung-cheol, secretary-general of the FKI.
But opponents blame the chaebol for squeezing the margins of their smaller suppliers and argue that their sheer scale leaves little scope for new competitors to prosper. Small and medium-sized enterprises account for most of the services sector and 92 per cent of employment in South Korea but make a far smaller contribution to growth, which remains driven by the manufacturers. Both Mr Moon and Ms Park have promised to do more to support these businesses, through measures such as preventing big conglomerates from opening small supermarkets that threaten small stores.
Similar measures by the present government this year provoked the ire of large companies: the chairman of the Korean subsidiary of Tesco, the UK retail group, drew a comparison with the policies of communist states. And coddling small businesses may be counterproductive for the economy as a whole, warns Lee Kark-bum, president of Future Thinknet, a research institute.
“Support for SMEs should be concentrated on businesses that contribute to the development of the services sector,” he says. “Support for family businesses whose aim is the survival of the family should be part of the country’s welfare programme.”
Priority, he adds, should be given to encouraging fast-growing start-ups in areas such as software. The presidential contenders say they will do so: Ms Park, for example, will establish start-up “incubators” in universities and use tax incentives to support investment in young businesses.
But Lee Han-joo, a founder of Sparklabs, which provides support and funding to venture companies, warns that there is far to go before Seoul provides a globally competitive launch pad for young entrepreneurs, who are of little interest to a conservative banking sector. “And if you look at the angel community, the venture capital community, the whole slew of options available to the start-ups in the US, versus in Korea? It’s not even a comparison,” he says.
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Some entrepreneurs have managed to overcome these obstacles, however – and one built on his business success to emerge this year as a contender for the presidency. Ahn Chul-soo, 52, built what is now the country’s leading antivirus software provider.
Mr Ahn withdrew from the race last month to avoid splitting the liberal vote, but he had attracted unprecedented support for an independent – particularly from young people disillusioned with the established parties. “Young people don’t feel cared about by the politicians – they were looking for someone new who could voice their concerns,” says Cho Hee-kyoung, Mr Ahn’s spokeswoman.
Young Koreans face stern academic expectations. Eight in 10 high school students receive private tuition and about the same proportion go on to university: the highest rate in the world. After their education – often funded by large amounts of debt accumulated by their parents – graduates often feel obliged to chase after an insufficient number of chaebol jobs.
Trendy coffee shops of Busan, a port city that is the country’s second largest, hum with the chatter of young people who are a crucial demographic sector for both candidates in this election.
Busan is a traditional conservative stronghold but polls suggest Mr Moon is making headway, particularly among young voters, in what could prove a key swing constituency.
Yet many young voters doubt both camps’ promises of sweeping reform, citing the continuing influence of the chaebol and expressing distrust of politicians in general.
"Being young in Korea is very hard,” says Kim Ji-ae, a 23-year-old student. “I want the next president to solve problems such as youth employment – economic democracy is the main thing. But I’m not sure if it’s possible.”
Additional reporting by Jung Gu-hun
Copyright The Financial Times Limited 2012
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