Mark Atkinson in Seoul
Been to the January sales yet? Picked up any bargains? Britain’s 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% 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 and sanitary napkin unit to Procter & Gamble, Bosch has taken control of its joint venture with Kia Motors, and Coca-Cola has acquired soft- drink bottling operations from Doosan, the nation’s largest brewer.
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.
But why would the fiercely nationalist South Koreans abandon the policy of industrial self-sufficiency that 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. Crdit 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% 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 fund 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.”
There is also an economic objection to the reform package: if the fund 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. True, Korea, whose credit rating has already been reduced to junk- bond status, would find it even harder to raise money on the international capital markets if it acquired a 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.
The practical point, however, is that financial liberalisation is not necessarily a stepping stone to an orderly system of market supervision and management. If it complies fully with the fund’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 fund 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. Soros says that an international credit insurance corporation should be set up as a sister institution to the fund. 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 macro-economic conditions in the countries concerned,” Soros says. ”This would render any excessive credit expansion unlikely.”
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 fund 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 is 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.
Following the IMF bail-out, 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 Koreans.