Themes > Current Issues
17.11.2000
Jayati Ghosh
It has
been broadcast as an impressive, almost spectacular recovery from the
financial crisis. From the beginning of 1999, the South Korean economy
appeared to show extraordinary potential for bouncing back from the
major recession into which it had plunged over 1998. Growth rates of
national output and of industry over the past one and a half years have
been in the region of 8 to 10 per cent, and even though investment has
remained subdued, the stability of the Korean won also suggested
that foreign "investor confidence" had been restored.
But even in this apparent bull run, serious analysts had already noted tendencies that were causes for concern. A major impetus for the revival in economic activity and growth rates was the expansionary fiscal stance, through very large government deficits that were enabled by Japanese aid in the form of Miyazawa Plan funds and allowed by a somewhat chastened IMF. The inflow of foreign direct investment that contributed to the stability of the won was dominantly in the form of acquisition of domestic assets by multinational investors at what were described as "bargain basement" prices.
And most importantly, the weaknesses of the large industrial giants that were the backbone of the Korean growth miracle of the preceding decades, have been more rather than less evident. The chaebol, which are now much reviled as privileged, opaque, cronyistic and unwieldy monopolistic conglomerates created by state patronage, were in fact the most significant elements in an industrialisation process that even dared to shift core-periphery economic relationships in the latter part of the past century.
Thus, the Korean chaebol, and in particular the four conglomerates that were most successful in creating internationally accepted brands - Daewoo, Samsung, Hyundai and Lucky Goldstar - challenged the traditional division of labour between metropolitan centres of capital and developing countries that were at best recipients or objects of such capital. As emerging and successful multinational companies with a home base in the developing world, they offered both hope and a threat to the existing international economic order.
The building of these conglomerates was the result of strategic industrial policy that took much from the Japanese example, along with the specific political economy features of South Korea. Systematic state intervention, especially in credit allocation, and crucial protection of domestic markets in the initial growth phase, were important elements of that strategy. The strong interlinkage between finance and industry that is now being interrogated, was actually a necessary part of both the high domestic savings and investment rates that fed the boom, and the rapid expansion and export success of these companies.
It is now apparent that many of the current troubles of the chaebol can be traced not to over-regulation, but to the deregulation of both industry and finance in the early 1990s in South Korea. The internal and external financial liberalisation measures of 1992-93 allowed the chaebol to access cheap finance freely, also because their impressive sales and export performance made them attractive to many creditors. This money was used for very ambitious investment in diversification and expansion, which in turn was possible because of the concomitant deregulation of industry.
This is what led during the 1990s to several of the chaebol overextending themselves in often unrelated activities, or creating huge capacities in some sectors, which have not been justified by subsequent demand patterns. The automobile industry is a case in point. Prior to the early 1990s, fairly stringent industrial regulation prevented capacities from exceeding the combination of (buoyant) domestic and external demand. But the 1990s witnessed a massive expansion of capacity as the Korean car producers sought virtually to corner the world market.
Cars were in fact the main instruments in Daewoo’s plans to become a major global player. The story of Daewoo is itself the most absorbing rags to riches saga of the late twentieth century. The company was founded by Kim Woo Choong who began his career as a shirt salesman. Aided by systematic state industrial policy, over thirty years he was able to build Daewoo into an important multinational company with more than 200,000 employees (half of them abroad) and annual turnover of more than $60 billion. By the end of the 1990s, Daewoo was involved in a wide production range spanning goods as unrelated as ships in South Korea, fertilisers in Vietnam, electronic goods in Europe, and of course cars.
By the mid-1990s, Daewoo controlled a quarter of the domestic South Korean market of around 2 million cars, and was expanding its production capacity into India, Poland and Romania. At the time, it was difficult to find an industry analyst or financial expert who could find any fault with Daewoo’s aggressive expansion strategy. Of course, once the financial crisis broke in late 1997, the carpers were quick to arrive, and accusatory fingers were
pointed at Daewoo’s unjustified diversification, its over-accumulation, and its huge debt to equity ratios of around 600 per cent.
The financial crisis and subsequent recession proved to be the beginning of the end for the Daewoo conglomerate, as it effectively collapsed under the mountain of its own bad debts, which finally amounted to more than $80 billion. Late last year, the chaebol was broken up into 12 separate businesses, one of the largest of which was Daewoo Motor.
This company, troubled though it was, was nonetheless one of the most respected corporate names in South Korea. But it was part of an industry whose troubles have only mounted in the past three years. The domestic market for cars has shrunk to 1.5 million, which is less than half the capacity of the domestic producers alone. The international market has also grown very slowly, and there have been major moves towards concentration because of this.
The shake-out has been greatest in South Korea, as many of the car makers that began the decade with grand ambitions ended it either under foreign control or swallowed by a rival. Thus, the fledgling Samsung car brand was acquired by Renault of France. Kia was consumed by Hyundai Motor, which itself has given up a 10 per cent stake to DaimlerChrysler. Daewoo was considered for purchase by both General Motors and Ford. But in September this year, Ford dropped its $7 billion bid for the company and, allowing Ford and Fiat to come in with a much lower bid.
This triggered off the final crisis. The crunch, when it came, was ultimately caused by the Korean state allowing it, even encouraging it , to happen. Thus, in early November Daewoo’s creditor banks suggested a "rescue package" entailing 3,500 job cuts and other severe provisions. This was rejected by the trade unions, and as a result, on November 8, the chief creditor bank - the state-owned Korea Development Bank - cut off its supply of loans. This meant that Daewoo was forced to default on short term debts to its suppliers. As a result, it was declared bankrupt and put into court receivership.
All this of course means that any new rescue package will be on terms that are extremely harsh from the point of view of the company and its workers. One estimate of potential job loss is as high as 500,000 counting the impact on Daewoo’s suppliers as well. If the Ford-Fiat offer was earlier seen as too predatory, any new offer is likely to be aggressively carnivorous.
It is not as if the assets to be picked up are actually valueless. Daewoo Motor’s Changwon factory is supposed to be the most efficient in the world., and several other of its factories are impressive in terms of state-of-the-art technology and highly productive workers. It also still has 20 per cent of the Korean domestic market share. None of these qualities is likely to prevent these assets from being sold for less than a song, or simply thrown away and allowed to waste.
What is worse, is that Daewoo Motor is not alone in facing such tribulation. The fate of Hyundai Construction - one of the country’s largest employers - hangs in the balance, as it finds itself unable to meet the debt service of nearly $1 billion dollars which is due now. Once again, the tightening of screws by the public sector banks which are its creditors is the proximate cause of its woes. At the moment it is being allowed to survive simply because another collapse at this point might be too much for both political and economic stability.
This is ironic. The apparent resolve of a supposedly popular government to allow these crucial companies to collapse, stems from its desire to search for and keep hold of the Holy Grail of "investor confidence". But the collapse of these companies not only causes severe pain in terms of unemployment and negative multiplier effects, it also creates widespread social and political unrest in a country in which unions and social movements remain relatively strong.
And this, in turn, displeases investors and reduces their level of "confidence". The Seoul stock market has already lost 50 per cent of its value over the past year, making it the worst performing bourse in the world. The contradictory effects of the government’s desire to placate highly demanding international capital may explain how this can happen despite the supposed bouncy recovery of the economy.
In the process, the challenge to metropolitan capital that was posed by the emergence of such developing country conglomerates, has been converted in South Korea into the more familiar (if more depressing) plea for succour.
But even in this apparent bull run, serious analysts had already noted tendencies that were causes for concern. A major impetus for the revival in economic activity and growth rates was the expansionary fiscal stance, through very large government deficits that were enabled by Japanese aid in the form of Miyazawa Plan funds and allowed by a somewhat chastened IMF. The inflow of foreign direct investment that contributed to the stability of the won was dominantly in the form of acquisition of domestic assets by multinational investors at what were described as "bargain basement" prices.
And most importantly, the weaknesses of the large industrial giants that were the backbone of the Korean growth miracle of the preceding decades, have been more rather than less evident. The chaebol, which are now much reviled as privileged, opaque, cronyistic and unwieldy monopolistic conglomerates created by state patronage, were in fact the most significant elements in an industrialisation process that even dared to shift core-periphery economic relationships in the latter part of the past century.
Thus, the Korean chaebol, and in particular the four conglomerates that were most successful in creating internationally accepted brands - Daewoo, Samsung, Hyundai and Lucky Goldstar - challenged the traditional division of labour between metropolitan centres of capital and developing countries that were at best recipients or objects of such capital. As emerging and successful multinational companies with a home base in the developing world, they offered both hope and a threat to the existing international economic order.
The building of these conglomerates was the result of strategic industrial policy that took much from the Japanese example, along with the specific political economy features of South Korea. Systematic state intervention, especially in credit allocation, and crucial protection of domestic markets in the initial growth phase, were important elements of that strategy. The strong interlinkage between finance and industry that is now being interrogated, was actually a necessary part of both the high domestic savings and investment rates that fed the boom, and the rapid expansion and export success of these companies.
It is now apparent that many of the current troubles of the chaebol can be traced not to over-regulation, but to the deregulation of both industry and finance in the early 1990s in South Korea. The internal and external financial liberalisation measures of 1992-93 allowed the chaebol to access cheap finance freely, also because their impressive sales and export performance made them attractive to many creditors. This money was used for very ambitious investment in diversification and expansion, which in turn was possible because of the concomitant deregulation of industry.
This is what led during the 1990s to several of the chaebol overextending themselves in often unrelated activities, or creating huge capacities in some sectors, which have not been justified by subsequent demand patterns. The automobile industry is a case in point. Prior to the early 1990s, fairly stringent industrial regulation prevented capacities from exceeding the combination of (buoyant) domestic and external demand. But the 1990s witnessed a massive expansion of capacity as the Korean car producers sought virtually to corner the world market.
Cars were in fact the main instruments in Daewoo’s plans to become a major global player. The story of Daewoo is itself the most absorbing rags to riches saga of the late twentieth century. The company was founded by Kim Woo Choong who began his career as a shirt salesman. Aided by systematic state industrial policy, over thirty years he was able to build Daewoo into an important multinational company with more than 200,000 employees (half of them abroad) and annual turnover of more than $60 billion. By the end of the 1990s, Daewoo was involved in a wide production range spanning goods as unrelated as ships in South Korea, fertilisers in Vietnam, electronic goods in Europe, and of course cars.
By the mid-1990s, Daewoo controlled a quarter of the domestic South Korean market of around 2 million cars, and was expanding its production capacity into India, Poland and Romania. At the time, it was difficult to find an industry analyst or financial expert who could find any fault with Daewoo’s aggressive expansion strategy. Of course, once the financial crisis broke in late 1997, the carpers were quick to arrive, and accusatory fingers were
pointed at Daewoo’s unjustified diversification, its over-accumulation, and its huge debt to equity ratios of around 600 per cent.
The financial crisis and subsequent recession proved to be the beginning of the end for the Daewoo conglomerate, as it effectively collapsed under the mountain of its own bad debts, which finally amounted to more than $80 billion. Late last year, the chaebol was broken up into 12 separate businesses, one of the largest of which was Daewoo Motor.
This company, troubled though it was, was nonetheless one of the most respected corporate names in South Korea. But it was part of an industry whose troubles have only mounted in the past three years. The domestic market for cars has shrunk to 1.5 million, which is less than half the capacity of the domestic producers alone. The international market has also grown very slowly, and there have been major moves towards concentration because of this.
The shake-out has been greatest in South Korea, as many of the car makers that began the decade with grand ambitions ended it either under foreign control or swallowed by a rival. Thus, the fledgling Samsung car brand was acquired by Renault of France. Kia was consumed by Hyundai Motor, which itself has given up a 10 per cent stake to DaimlerChrysler. Daewoo was considered for purchase by both General Motors and Ford. But in September this year, Ford dropped its $7 billion bid for the company and, allowing Ford and Fiat to come in with a much lower bid.
This triggered off the final crisis. The crunch, when it came, was ultimately caused by the Korean state allowing it, even encouraging it , to happen. Thus, in early November Daewoo’s creditor banks suggested a "rescue package" entailing 3,500 job cuts and other severe provisions. This was rejected by the trade unions, and as a result, on November 8, the chief creditor bank - the state-owned Korea Development Bank - cut off its supply of loans. This meant that Daewoo was forced to default on short term debts to its suppliers. As a result, it was declared bankrupt and put into court receivership.
All this of course means that any new rescue package will be on terms that are extremely harsh from the point of view of the company and its workers. One estimate of potential job loss is as high as 500,000 counting the impact on Daewoo’s suppliers as well. If the Ford-Fiat offer was earlier seen as too predatory, any new offer is likely to be aggressively carnivorous.
It is not as if the assets to be picked up are actually valueless. Daewoo Motor’s Changwon factory is supposed to be the most efficient in the world., and several other of its factories are impressive in terms of state-of-the-art technology and highly productive workers. It also still has 20 per cent of the Korean domestic market share. None of these qualities is likely to prevent these assets from being sold for less than a song, or simply thrown away and allowed to waste.
What is worse, is that Daewoo Motor is not alone in facing such tribulation. The fate of Hyundai Construction - one of the country’s largest employers - hangs in the balance, as it finds itself unable to meet the debt service of nearly $1 billion dollars which is due now. Once again, the tightening of screws by the public sector banks which are its creditors is the proximate cause of its woes. At the moment it is being allowed to survive simply because another collapse at this point might be too much for both political and economic stability.
This is ironic. The apparent resolve of a supposedly popular government to allow these crucial companies to collapse, stems from its desire to search for and keep hold of the Holy Grail of "investor confidence". But the collapse of these companies not only causes severe pain in terms of unemployment and negative multiplier effects, it also creates widespread social and political unrest in a country in which unions and social movements remain relatively strong.
And this, in turn, displeases investors and reduces their level of "confidence". The Seoul stock market has already lost 50 per cent of its value over the past year, making it the worst performing bourse in the world. The contradictory effects of the government’s desire to placate highly demanding international capital may explain how this can happen despite the supposed bouncy recovery of the economy.
In the process, the challenge to metropolitan capital that was posed by the emergence of such developing country conglomerates, has been converted in South Korea into the more familiar (if more depressing) plea for succour.
© MACROSCAN 2000