---------- Forwarded message ---------- Date: Sat, 17 Jan 1998 13:03:26 -0800 From: Sid Shniad <[EMAIL PROTECTED]> Reply-To: Forum on Labor in the Global Economy <[EMAIL PROTECTED]> To: [EMAIL PROTECTED] Subject: The sell off of Korea Inc. (fwd) > NO BARGAINS FOR KOREA IN THIS SALE > > The IMF rescue package will ultimately benefit the West far more than Seoul, > writes Mark Atkinson in the 'The Guardian Weekly' (week ending January 11, > 1998) > > BEEN to the January sales yet? Picked up any bargains? Procter & Gamble has; > so too has Germany's Robert Bosch. Not in the big department stores of > London, New York or Paris, of course. This sale is taking place in South > Korea, and on offer is more than a new winter coat or three piece suite. Much > of the country is up for grabs. > > In return for a financial aid package worth a record $57 billion, the > International Monetary Fund has, among other things, forced Korea to > liberalise and deregulate, including dropping restrictions on foreign > takeovers. > > Since December 30, foreign investors have been able to acquire a 55 per cent > stake in any listed company. By the end of this year, they will be able to > buy the lot. > > Business has got off to a slow start. Ssangyong sold its tissue and sanitary > napkin unit to Procter & Gamble, Bosch has taken control of its joint venture > with Yja Motors, and Coca-Cola has acquired soft drink bottling operations > from Doosan, the nation's largest brewing institution. > > Other deals are in the offing: Hanhwa, for example, is reported to be > negotiating the sale of its oil refining and petrol station business to a > leading international refiner, thought to be Royal Dutch Shell. > > Before long the shelves may be cleared in much the same way as those at the > Harrods crockery and hi-fi departments will be by the end of the month. > > But why would the fiercely nationalist South Koreans abandon the policy of > industrial self-sufficiency which built their economy into the world's 11th > biggest? > > For two reasons. First, South Korea's chaebols, or conglomerates, are > collapsing under the weight of their awesome debts and need the money. > Starved of credit, they are being forced to shed excess businesses to stay > afloat. > > Credit Lyonnais Securities reckons that only 87 of Korea's listed companies > out of a total 653 non-financial firms are relatively safe from the predators. > > SBC Warburg Dillon Read, the investment bank, believes that even household > names such as Hyundai and Daewoo may be vulnerable unless they restructure > quickly. > > Second, the prices are of the bargain-basement variety. The Korean currency, > the won, fell by about 50 per cent against the US dollar last year. Share > prices also plummeted. These falls make Korean companies rich pickings for > expansion-minded foreign multinationals, through direct takeover or portfolio > investments. > > They may be hesitant at the moment, fearing further falls in the months ahead > as the crisis continues. But when Western managements are confident that the > bottom has been reached they will swoop. When they do, will it be a cause for > celebration or regret? > > In one sense, there can be cheers - and not just on the part of the foreign > investors anticipating fat profits. Korea's crony capitalism was not > sustainable. The chaebols survived on cheap, state-directed bank loans, some > of which came indirectly from abroad, which made them complacent. They were > able to invest in schemes with little or no productive value. When Western > owners arrive en masse in Korea they may administer a welcome dose of market > discipline. > > But the sell-off of Korea Inc. also leaves a nasty taste in the mouth, and it > will not necessarily solve the country's economic crisis in the long term. It > may even make the economy more unstable. > > There is something morally distasteful about the IMF lending money for Korea > to pay off its short-term foreign debts and in return demanding draconian > reforms which will ultimately benefit the West, and meanwhile requiring Korean > shareholders, depositors and employees to suffer. In his new year message, > South Korea's president elect, Kim Dae-jung, warned: "Inflation will flare up, > unemployment rise and numerous companies collapse." > > 'Mere is also an economic objection to the reform package: if the IMF once > again rescues foreign fund managers from the consequences of an unwise > investment, there is no incentive for them to change their behaviour. > Investment in emerging markets is rapidly becoming a one-way bet. Either it > pays off with huge returns to reflect the supposed risk of the investment or, > if it all goes down the toilet, the international bodies step in to bail out > foreign creditors. > > There is an alternative. Korea could simply default on its loans. Western > banks could take the hit. Perhaps they would then be more careful about > lending money abroad in the first place, instead of simply being blinded by > greed. > > True, Korea, whose credit rating has already been reduced to junkbond status, > would find it even harder to raise money on the international capital markets > if it acquired the reputation as a defaulter. But what money the Koreans have > left could be used to reflate the domestic economy rather than pay off foreign > debts. > > If Thailand had not attracted so much footloose foreign capital, it would not > have run into the difficulties which ultimately brought the economy to its > knees and sparked the whole Asian crisis. > > Yet the IMF is now suggesting Korea follow the same route as Thailand. If it > complies fully with the IMF's request to open up its economy, Korea could > become more, not less vulnerable to capital flight in the future. So what > should be done to guard against this danger? > > Various suggestions will no doubt be forthcoming from the IMF and the Group of > Seven during their regular meetings this year. But they will probably amount > to no more than better surveillance and greater transparency. > > > Meanwhile it has fallen to none other than George Soros, the arch-speculator, > to come forward with a solution. From the man blamed by Malaysian prime > minister Mahathir Mohamad for causing the Asian crisis comes a plan involving > greater regulation of the international capital markets. > > MR SOROS says that an international Credit Insurance Corporation should be set > up as a sister institution to the IMF. Its job would be to guarantee loans > for a small fee. Borrowing countries would be obliged to provide data on all > borrowings, public or private. This would enable the new authority to set > limits on the amounts it would be willing to insure. Creditors going beyond > these limits would be on their own. > > "The authority would base its judgment not only on the amount of credit > outstanding but also on the macroeconomic conditions in the countries > concerned," Mr. Soros says. 'This would render any excessive credit expansion > unlikely." > > Mr. Soros admits that there are difficulties. "The most important is the link > between the borrowing countries and the borrowers within those countries. > Special care must be taken not to give governments discretionary power over > allocation of credit because that could foster corrupt dictatorships," he > says. > > But it certainly seems worthy of serious consideration at the high tables of > international finance, which have shown a marked lack of imagination in > dealing with the Asian crisis. > > The IMF has acted with great speed to prevent the crisis spilling over into > advanced economies, by making sure their debtors can repay loans. But > sweeping away impediments to foreign ownership are not necessarily in the best > interests of countries such as Korea. > > Armed with a competitive currency following the devaluation of the won, Korea > might have been better off left alone to export its way out of trouble and > restructure using internal financing drawn from a high level of domestic > savings. > > 'The difficulty is that this would not have gone down well in the West, which > would have seen its share of export markets eroded without any offsetting > benefit. > > As it is, following the IMF bailout, Korea as a production base will still > enjoy a significant cost advantage over the West. But the profits of > Korean-based enterprises will flow to US, European and Japanese owners, not > the Koreans.
