Date: Mon, 19 Jan 98 11:55:30 CST|
From: "Dale Wharton" <1%dale.CAM.ORG@WUVMD.Wustl.Edu>
Subject: selloff of Korea
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).
The IMF rescue package will ultimately benefit the West far more than
By Mark Atkinson, The Guardian,
11 January 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 suit. 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
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
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
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
Credit Lyonnais Securities reckons that only 87 of Korea's listed
companies out of a total 653 nonfinancial 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 selloff 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."
There 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
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
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
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
"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.