Of Profits & Reconciliation: Kaesong Industrial Complex

They say the road to hell is paved with good intentions, and that certainly seems to be the case here: opened in 2004 as a manifestation of the late Roh Tae Woo's "sunshine policy" of South towards North Korea, it was hoped Kaesong Industrial Complex would herald closer economic ties between the two Koreas. Located in the North near the now-legendary 38th parallel, this (quasi-) export processing zone was modelled in part on the example of other successful EPZs in the region. Through trials and tribulations you are all well aware of including North Korea's penchant to throw tantrums every so often, Kaesong has not really lived to its billing. Not only has South Korean investment there been (wisely as it turns out) somewhat limited, but closer economic ties leading to better political ones did not emerge.

That said, there have been some South Korean investors who saw potential advantages in low-cost labour north of the border. It could even have led to knowledge transfer helpful to north Korean development. Many of them poured not-insubstantial savings into facilities in Kaesong, only to be stung this year as occasional short-lived evacuations and closures since 2004 have now led to full-scale desertion of the industrial estate. Can you say "mass expropriation"?

The South Korean entrepreneurs who invested up to 10 years and millions of dollars in the Kaesong industrial complex, a symbol of economic collaboration between the Koreas that is now shuttered by the North, have little more than hope to cling to as assembly lines sit idle day after day. They say they want to go back to work. The sooner the better. They say they cannot abandon their investments in factories, or the cheap North Korean labor that helped them put aside misgivings about doing business with the South's unpredictable neighbor. Some were just getting over their beginners' mistakes and were starting to see the fruits of their work. 

But North Korea has been unrelenting in its decision to bar South Koreans from entering the factory city just inside its border, and withdraw the 53,000 North Korean workers who manned assembly lines. As the lockout enters a third week, customers of the South Korean companies are growing impatient and losses are mounting. Some businesses are quietly mulling giving up on Kaesong altogether.

"We have built the Kaesong industrial complex by the sweat of our brows, believing in guarantees that we would be able to work freely," said Han Jae-kwon, chief of the association of South Korean factories in Kaesong. "We find the reality tragic and sad that we are unable to travel to our own factories." The Kaesong complex has been nearly deserted since early April, when Pyongyang pulled the plug on its last significant economic link with the South. Most of the nearly 900 South Korean managers and entrepreneurs left soon after. Some 200 remain and are getting by on whatever food they had stored.

It does not seem fair that positively-minded South Koreans who went there for non-economic reasons--especially a desire to bring about reconciliation--are being punished for their efforts. When only one side wants to talk it over regarding Kaesong, that's not going to work as firms located there keep losing international business. But then again, how did the saying go about the road to hell? One certainly hopes they will recoup their investments when North Korea again relents on its comic-fantasist-Leninist-Marxist stylings, but the damage has been irreparably done to the idea that the hermit nation would interfere less with this project that seemed so promising all those years ago.

UPDATE: Employing North Korean style hyperbole--don't ask me why--South Korea has made an ultimatum on re-opening Kaesong and releasing the South Korean managers held captive there:

After weeks of threatening rhetoric from the North, South Korea on Thursday promised its own unspecified "grave measures" if Pyongyang rejects talks on a jointly run factory park shuttered for nearly a month. The park in the North Korean border town of Kaesong is the most significant casualty so far in the recent deterioration of relations between the Koreas. Pyongyang barred South Korean managers and cargo from entering North Korea earlier this month, then recalled the 53,000 North Koreans who worked on the assembly lines.

South Korea's Unification Ministry on Thursday proposed working-level talks on Kaesong and urged the North to respond by noon Friday, warning that Seoul will take "grave measures" if Pyongyang rebuffs the call for dialogue. In a televised news conference, spokesman Kim Hyung-suk refused to say what those measures might be. Some analysts said Seoul would likely pull out the roughly 175 South Korean managers who remain at the complex.

UPDATE 2: On 2 May, aside from "repatriating" the remaining South Korean managers these past few days still keeping guard over their firms' plant, property and equipment, South Korea has decided to lend these pioneering firms emergency aid. Call it an unexpected but most certainly welcome form of "political risk insurance" insofar as outright grants cannot be given:

South Korea has offered 300 billion won ($272.41 million) million in special loans to companies affected by Pyongyang's decision last month to close a jointly run industrial zone in North Korea, a government official said on Thursday. A government taskforce will provide the assistance from May 6 in the form of loans with interest rates of 2 percent. More than 120 South Korean businesses have invested in the border complex at Kaesong.

"The government is currently trying to provide tailored support for these businesses and once we finish determining the current status of the companies, we will continue to make more support available," said Suh Ho, a director-general at the Unification Ministry which deals with inter-Korean affairs. Suh said cash handouts to the companies were legally impossible and that loans - money for which will be taken out of various government funds - were the only available solution in the short-term.

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Enter Big Government, S Korean Welfare State?

One of the unspoken things many Asians feel has contributed to Western malaise is the ubiquity of extensive welfare states. With the so-called baby boom of those born in the immediate post-WWII era reaching retirement age, these countries are beginning to feel the massive fiscal pressure of providing for pensions and health care for those no longer working. Think of those hapless uber-bankrupts in the United States who cannot roll back promises made long ago that they cannot possibly meet--more so now given America's utterly pathetic growth rate.

Why, then, would leading Asian countries flirt with consigning themselves to a similar fate? Apparently, this is the very question facing South Korea--your archetypal success story. Needless to say, this success has not benefited everyone equally, hence calls to reform the Korean system away from massive industries (chaebol) and provide more opportunities for others not fortunate enough to be so favoured:

From childcare to old-age pensions, Park [Geun-Hye] wants to ramp up social spending by $125bn over the next five years as she responds to growing complaints that the proceeds of growth have been skewed towards the rich and the chaebol conglomerates that dominate the economy.

Ms Park is presenting this as a turning point after decades of small government. While the country is, by some measures, as prosperous as Italy or New Zealand, its spending on public services remains far lower than in most developed countries. Ms Park believes that this must change as the nation enters the next stage of its development. But do her sums add up?

It all sounds great on paper, but the question must be asked: Who's going to pay for it? I'm afraid Park is not so clear on this point (yet):

Instead, 60 per cent of the $25bn annual funding cost - which amounts to about 2 per cent of GDP – will come from eliminating wasteful government expenditure, although Ms Park has given no details of where these savings can be made. The remaining 40 per cent, she says, will come from regularising and taxing South Korea’s informal economy, which she believes to account for a quarter of GDP.

In short, Ms Park will fund her programme through measures that sound attractive to everyone. But until she gives more detailed proposals, there will be plenty of scepticism over whether this can really yield the sums required. And the latter could be bigger than Ms Park admits.

I am generally sceptical about claims that budgetary gaps can be closed by efficiencies in tax collection and stricter expenditure, and I don't see why I shouldn't be just because it's South Korea we're talking about here. Sure it's a country that works unlike any number of dysfunctional Western ones, but despite the popular acclaim there for a welfare state, did they ever consider that the problems the West faces stem in large part from it?

The matter is something to ponder even if the implications would be politically incorrect.

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South Korea Declares Int'l Currency War on Japan

Ho hum, another week, another declaration by a non-Western country that it will attempt to staunch the inflow of capital from elsewhere that is driving up the local currency and making imports less competitive. Japan of course started the latest salvo when the LDP regained power and promptly declared that they would use open-ended fiscal and monetary support to get the Japanese economy jump-started after over two decades now of stagnation. (Western nations have long been on this path, having implemented them after the global financial crisis.)

In response, other Asian exporters have been manoeuvring to deal with the ongoing deluge from Nippon. Spooked investors in South Korea have begun pulling out in fear of the authorities taking a more proactive stance in determining the value of the Korean won. I suppose the Korean authorities are pleased with the results of their verbal jawboning thus far of making foreign investors think twice and weakening the currency:

South Korea's threat to impose a broad tax on financial transactions is the first sign of deepening concern in Asia that speculation of competitive currency devaluations is prompting investors to head for the exit. Until then, and because investors had not shown any big signs of concern, Asia's reaction to the tensions centring on the yen had been passive, comprising an asymmetric mix of jawboning and light currency intervention.

The selloff in Seoul markets this week turned into a warning sign. Foreign investors posted their biggest daily stock selloff in 16 months in South Korea and pushing the won, a currency that best serves as a proxy for Asia, to a three-month low. The risk is that the threat of policy action will prompt more market selling, pushing currencies down yet further and raising investor fears of the competitive devaluations that policymakers are trying to avoid.

"Korea is going to be the first domino, and it's that domino effect that the yen's depreciation clearly risks," said Rob Ryan, currency and rates strategist at RBS, referring to the increasing likelihood that Korea announces some form of currency control measure soon. "The real trigger has been the equity market reaction and the outflows from Korea. I think the concerns over intervention are a little overdone just yet, but clearly it is a big risk if the yen continues to weaken..."

The old state-guided development is returning with a vengeance as the government is seeking the cooperation of conglomerates and state-owned firms alike in stemming Korean won strength:

South Korea has understandably been the most vocal of Asian policymakers on the subject of the yen. Heavyweight Korean exporters such as Samsung Electronics Co and Hyundai Motor Co, which compete directly with Japanese electronics and auto companies, have seen their competitiveness eroded as the won increased in value from as low as 15 per yen to near 11.8 over the past six months. Foreigners have sold a net 1.8 trillion won ($1.65 billion) Korean stocks this month. The stock market is down 3 percent so far this year. Foreigners have been buying Taiwanese stocks, but those volumes are far lower than they were in 2012...

The Korean government will tell state-controlled firms to refrain from borrowing abroad and will further tighten rules on banks' currency derivatives trading to ease volatility in foreign exchange markets, Choi said. Seoul was opposed to imposing an outright levy on financial transactions, such as the Tobin tax being debated in Europe. But it would consider similar measures should speculation in the won intensify over time, he said.

There are follow-on effects that may be even direr. China, for one, is South Korea's single largest export market and may not take so kindly if the won is regulated further:

Still, many believe policy risks are rising. Nearly half of Japan's trade is with the Asia-Pacific region and China may not stand pat if Korea imposes currency controls given it is Korea's largest export market. In addition, capital controls have gained some acceptability as a policy response in emerging markets to deal with easy money in the developed world. Even the International Monetary Fund, traditionally a champion of liberalised markets, has conceded that capital controls are sometimes necessary.

I guess the trick is to spook hot money but not real investors who are in it for the longer haul. Where does that divide lie? Hard to tell, but Korea risks negating market sentiment if it goes overboard with these efforts to throw sand into the wheels of international finance and trade. It's not surprising that international currency war has finally hit East Asia--but remember who started it in the first place despite repeated denials.

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Victors and Vanquished: Korean Cars in Europe

Seeing what Japanese carmakers did to the United States automobile industry during the Eighties, the Europeans have always been wary of the same story repeating itself in their part of the world. However, the remarkable thing for many years is that while Japanese brands have made inroads into the European auto market, they have never been dangerous enough to existentially threaten the likes of France's Peugeot and Renault or Italy's Fiat among others. In the aftermath of the global financial crisis, car sales have indeed fallen--but have hit European and Japanese makes alike

However, as of late Korean cars have quickly gained market share in a way that Europeans once feared the Japanese would. Keenly priced and well-built, Korea Inc. has made a reasonably lucrative living selling cars in a stagnant-to-declining car market. Make no mistake: it is not a happy sales scene in Europe for those selling four-wheeled vehicles for private use. Plant closures all over the continent have occurred or are imminent on the continent as the realization that massive overcapacity finally hits both carmakers and nations hosting their factories alike.

But all is not gloom. I had forgotten to post this earlier, but the French among others are complaining about the particular threat Korean cars pose--especially with a South Korea-EU FTA already in effect. The French petitioned the EU for surveillance to be implemented late last year that could lead to the reimposition of duties by invoking safeguard mechanisms. Euractiv describes the (failed) effort:

The French government said it "regrets" the European Commission's decision to turn down a request by France to monitor South Korea car imports, after a bilateral trade deal entered into force in July 2011. France had in August called on the Commission to require South Korea to give advance notice of planned car exports to the European Union. Since a free trade agreement (FTA) entered force in July 2011 a surge of auto shipments to the EU from South Korea has taken place.

Korean car imports into the EU rose by 41% in the year to the end of June 2012. During the same period, the increase in France was 24%, Eurostat data show. In July, France's biggest carmaker, PSA Peugeot Citroën, announced plans to close a plant near Paris and cut 8,000 jobs. French carmakers are in general losing market share and struggling due to rising competition from, among other producers, Korea's Hyundai and Kia. The surveillance France sought would have meant authorities could have demanded a document to accompany products scheduled for export to the EU.

The EU shot down the French claim to exceptional circumstances:

On Monday, the Commission sent a letter to France explaining that the French request was based on a provision requiring them to show that imports were concentrated in one or several EU member states and this condition had not been met. "While it is true that the car sector in the EU, and in particular in France, is going through a difficult period, this cannot be attributed to the entry into force of the EU-Korea FTA," EU Trade spokesman John Clancy said, cited by the Reuters news agency.

Is it simply another application of time-tested French dirigisme? It could be, but the difference now is a clear existential threat to the likes of Citroen-Peugeot and Renault as proud French flag-bearers. While it's tempting to blame the Koreans, I simply think they are selling products more in touch with the times. During times like these, the value proposition is foremost in the minds of buyers, and no amount of "Buy French" campaigns will change matters just as "Buy American" has repeatedly fallen under deaf ears Stateside.

The Koreans have obviously outmanoeuvred any number of European carmakers, but to their credit they have also outdone the Japanese in inking an FTA. Ever so retrograde, European carmakers still fear Japanese cars flooding Europe if a Japan-EU FTA is signed [!] Get real. As the saying goes, the early bird gets the worm--and the Koreans got there well ahead of the queue since the Japanese are merely attempting to catch up after many, many years of relatively humdrum sales in Europe.

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TorrentWorld: How LED TV Makers Co-Opt Piracy

Pssst...is that a 720p or a 1080p? Here's one last story whose implications run in the billions and billions that involves home entertainment as we come to the end of the holiday season. (Oh, the sacrifices I have to endure alike watching a digitally enhanced Mariah Carey moping around in a Santa outfit with Justin Bieber.) Call it fortuitous timing, but our old Sony CRT TV finally conked out prior to start of the holiday season. Gone. Kaput. Off to the see the Great Mother Cathode Ray Tube in the Sky. As its replacement, we bought a brand spanking new LG 42LS5700 for a low, low price. Its feature set blows anything twice the price from three years ago out of the water--resolution enhancement, 120 Hz, Internet TV with Flash player...you name it, Lucky-Goldstar has it.

Much to the chagrin of the software industry, piracy has become more difficult to control with the advent of torrents as invented by Bram Cohen. Back in the day when pirated physical media still played a large role, it was much easier to single out shady fly-by-night types who had machines that spewed copies by the thousands in unmarked warehouses in city centres. With the advent of torrents, it has become much more difficult to prosecute everyday people, AKA normal consumers like you and me. Industry associations are made to look especially bad by injudiciously suing teens in ill health and many others besides.

Fortunately for the almighty consumer, the hardware industry does not have similar objections to pirated TV series and films as I've found out after buying the LG. Why are prices going down rapidly to our benefit? It's because global shipments are already in decline. To no one's surprise, the world's most dominant players in this space are LG nee Lucky-Goldstar and Samsung. The competition is cutthroat, and they're supposedly the only two who make money selling LED TVs. For all their consumer appeal, let's just say LG and Samsung are not exactly the most scrupulous of operators, having bilked consumers via price fixing for years and years and being cited for doing so by various authorities.

With many watchdogs now monitoring their price fixing propensities, we are fortunate in that prices are tumbling and features are increasing as they seek to maintain a competitive advantage. One of the things I've found out--from intellectual curiosity about the workings of smart TVs, of course ;-)--is that the latest generation of units pretty much play whichever format you throw at them--WMA, MPEG, WMV-HD, MKV. Name your (perhaps less-than-legit) source and the TV will play it. While it isn't as foolproof playing these kinds of sources as the incomparable (and free) VLC, let's be realistic here. With three USB ports to mess around with, you can go knock yourself out with a lifetime's worth of high-quality video entertainment sources without paying a single cent for software. H.264 compression is your friend with video quality that outshines DVD (720p outdoes it) or nearly equals Blu Ray (1080p) standard as long as you can sacrifice some audio quality.

As you may have guessed, co-option of video piracy is no accident; LG has been demoing their TVs' abilities to play pirated movies for a number of years now. As I said, they're in the hardware business, not the software business. So, if their customers want to mess around with XviD and DivX, who's to tell them not to? While Korea's entertainment industry is burgeoning, let's just say that the K-Wave has yet to take over the world. Moreover, their software industry and its association have not exactly reached a scale substantial enough to take their piracy concerns to the likes of industrial giants LG and Samsung. (BTW, there is a K-Wave paid channel on my Smart TV which I obviously haven't tried yet.)

Real trouble over conflict of interest is for TV makers with substantial entertainment production holdings. I am of course referring to poor old Sony which long ago lost its TV street cred to the Korean duo. The loss of its brand equity to the likes of Apple in audio and LG/Samsung in video is well-documented, but I think that an underinvestigated consideration is that Sony has software interests in both audio (Sony Music Entertainment was formerly Columbia Records plus Bertelsmann) and video (Sony Pictures Entertainment was formerly Columbia/Tri-Star Pictures) software. Sony's longstanding love of proprietary formats aside, it has been slow to cotton up to playing newer formats favoured by software pirates to their (financial and market share) loss. While Sony has begrudgingly introduced TVs that play file formats Korean makes have no trouble with, let's just say playback issues are still plentiful.

As longtime buyers of LGs and Samsungs, I guess it's just desserts that we now have more features to play with given how long they've been manipulating flat screen prices. Bastards.

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Gangnam Fail: A White Guy on K-Wave's Success

I am verily annoyed by an FT op-ed by neoconservative stalwart Christopher Caldwell that so happens to be the most-read article in the opinion section at the moment, so please indulge me in starting off the year with a critique. (This remains a blog, after all.) I do not need to reiterate how Americans are among if not the most insular of people, profoundly unconcerned with the rest of the world. Caldwell's best-known work is a me-too "Eurabia" book peddling apocalyptic scenarios about the forthcoming takeover of Europe by Muslim migrants. It is curious how most of the authors of such books tend to be American; the implicit fear is that Europe is but a step on Islam's global takeover with the US next in line.

After unconvincingly "enlightening" us on Islamic culture's presence in Europe, Caldwell now turns his  attention to the phenomenon of Psy as a spearhead of the Korean Wave of creative industries. Displaying characteristic American insularity of the white-as-snow variety, he is rather late to the game alike his compatriots. In the rest of the world, K-Pop has been a phenomenon over a decade old which stretches from music to TV series to movies. (Lest you think I exaggerate about his cultural blinders, he even mistook Justin Beiber as an American in the op-ed prior to numerous readers pointing this out; see the correction at the bottom of the article.) Interestingly, the FT which he writes for gets this point right via Lex:

President Barack Obama has talked about it. Madonna and Ai Weiwei, among many others, have danced to it. That would be the K-wave, or the overseas export of Korean culture. This was the year that rapper Psy made the world aware, Gangnam style, of a long-running Asian phenomenon [my emphasis]. According to a survey, those who like K-Pop were more disposed to try other Korean products. It is no surprise then that Seoul convened a panel this year to see how to keep surfing the wave.

Last I checked, the Asia-conquering "Winter Sonata" telenovela began production in 2002. Moreover, I recall pirated DVDs being hawked in Los Angeles' Chinatown shortly thereafter of this and other Korean series that had become popular throughout Asia before torrents dealt away with having to mess around with disks.

However, the most profound and insightful misunderstanding from Caldwell that instead demonstrates the white man's blindness is his attribution of the success of American cultural products to its economic might. By the same token, we should see the emergence of more global cultural artifacts like Psy (or at least in America that are evident to white people) as the US becomes mired in economic stagnation:

What the US has is not a national genius but wealth, prestige and glamour. The world is always curious about how wealthy, prestigious and glamorous people dance, fight and fall in love. If this is correct, then the American misjudgment of what other people are really buying from them is going to turn out to be a costly mistake. Obviously, the producers and venture capitalists who drive the entertainment industry will happily turn their focus towards any country that can produce blockbusters...

Should the US reputation for mismanagement, profligacy and trillion-dollar government deficits continue to grow, non-US corporate executives will at some point ask why they are paying an architect to design a conference room like those in Manhattan. Why not get one like they have in Pudong? By the same token, why not ask how people are dressing in Gangnam rather than in South Beach? Culture follows wealth, prestige and glamour. As the US share of these declines, the world’s viewers may come to prefer Sleepless in Seoul to Sleepless in Seattle.

If wealth determines pop culture success, how would Caldwell explain the following:

• As he himself understands, "Gangnam Style" does not laud the lifestyles of the rich and famous in South Korea but is rather a critique of self-important residents in one of its tonier locales;
• Rap music (without which "Gangnam Style" would not have emerged) as a critique of inequality and racism in a supposedly egalitarian, equal opportunity society;
• Reggae music emerging from the country of, er, Jamaica--not exactly high on wealth, prestige or glamour but rather poverty, crime and homicide;
• Rhythm and blues, jazz, soul, and other African-American genres receiving massive international success instead of, say, square dances and barbershop quartets;
• For an Anglo idiom, how about punk which sneers at Caldwell-esque notions of whitebread well-being.

In other words, ascribing the success of cultural products to keeping up with the lifestyles of the rich and famous is dubious. If we followed the simplistic Caldwell recipe for the success of cultural exports, why is the world's richest nation in per capita terms, Qatar, not a powerhouse in music and movies? If he were enrolled in a cultural studies course and presented this inept argument, Caldwell would get an "F" straight away.

To me, there are many more things that help determine pop culture success--including deft marketing. In reality, much K-Wave is alike its American equivalent in being superficially attractive but ultimately vapid. Interestingly, this line of criticism often emanates from Koreans themselves. Of course good-looking people singing and dancing tend to catch the eye more. What the Koreans have done which many of their Asian peers have not really achieved is to imbue entertainment products with high production values--choreography, cinematography, costumes, lighting and so forth that approach the best global standards. That they happen to be (mostly) in Korean language doesn't necessarily mean that Korean culture is ascendant, but again that they are able to combine high production values to messages Asians can relate to which Westerners occasionally get, Oppa Gangnam Style. Ever bothered to read its lyrics translated into English? We're not exactly dealing with KRS-One here. It's mostly commerce; that's all.

I tired long ago of people living in their whitebread world trying to explain everything else in Amerocentric terms whether in IPE or elsewhere. That's part of why this blog exists--to present an informed (non-white) counterargument. Caldwell is clearly among the worst offenders.

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South Korea as the Catholic Church's Asian Tiger

Long lay the world in sin and error pining...

The Roman Catholic Church is savvy enough to know that its game is for the most part up in Western Europe. Lip service to a "Catholic revival" in that part of the world aside, we all know a declining market when we see one. Its resources are not really being used to fight a rearguard motion for a European reconquista. While there are some holdouts alike Poland, it's obviously in Eastern Europe. Nosediving church attendance, skyrocketing rates of illegitimacy and all the rest of it tell the tale. I fear that a Catholic revival in Europe is as much a lost cause as a surplus-running United States. At this rate, it will not be long before Catholic voices will start wondering why their headquarters remain in such an unappreciative continent when there are many other places where the Church would receive a much better reception. That is, what is the cost-benefit calculation of losing the "Roman" bit?

A thrill of hope the weary world rejoices
For yonder breaks a new and glorious morn...

But, the Good News is that the Church still manages to gain adherents in developing parts of the world alike Africa and Asia, with the number of priests increasing to meet new demand. Just like any old business, the Catholic Church appreciates that this is a game of numbers--albeit its concern is saving the most souls as opposed to more temporal concerns alike ROI. Moreover, its "investment" in the developing world is more likely to pay dividends given the more promising demographics there of followers yet unborn. That said, Asia is a funky place to promote religion. Just as China is famous for its intellectual property, er, lapses, so is it known for its habit of ordaining fake bishops. Since the Communist Party regards all other possible sources of authority with suspicion, it is hard to imagine the world's most populous nation gaining many more converts.

South Korea, meanwhile, is highly atypical in many respects. It is an OECD member and thus considered by most as a developed country. Its population is comparatively small as well at under 50 million. Alike other Asian tigers, it has among the world's lowest fertility rates. You would think increasing affluence would render more Koreans less religious and its demographic profile less attractive to the Church, but surprise, surprise: In South Korea, Roman Catholicism has spread like wildfire in recent years. Unlike Europe that could certainly use an opiate for the masses given its less-than-stellar economic fortunes, the still-rising Koreans have turned to the Gospel. Fr. Pierro Gheddo of the Pontifical Institute for Foreign Missions lays out the landscape:

There may be no other country in the world that over the past half century has seen growth as sustained as that of South Korea, including conversions to Christ. From 1960 to 2010, the number of inhabitants went from 23 to 48 million; per capita income from 1,300 to 19,500 dollars; Christians from 2 to 30 percent, of which about 10-11 percent, 5.5 million, are Catholic; there were 250 Korean priests, today there are 5,000.

I first went to South Korea in 1986 with Fr. Pino Cazzaniga, a missionary of the Pontifical Institute for Foreign Missions in Japan, who speaks Korean. Even back then it was a Church with many conversions, and it is still so today. Every parish has from 200 to 400 baptisms of converts from Buddhism each year. Most of the converts are city dwellers. Each year there are 130-150 new priests, one for every 1,110 baptized. In 2008, the proportion of Catholics exceeded 10 percent of South Koreans, and grows by about 3 percent each year. In 2009, the number of baptized reached 157,000, and 149 priests were ordained, 21 more than in 2008. More than two thirds of the priests are under the age of 40. "Over the past ten years, the Catholic Church in Korea has gone from three to five million faithful; in Seoul we are 14 percent," Cardinal Nicholas Cheong Jin-suk, archbishop of Seoul, has said in an interview.

It is certainly contentious to relate Europe's economic decline with its spiritual one so I won't even go there, but in South Korea's case you can make the opposite argument that secularization does not necessarily accompany economic progress. It appears increasingly prosperous Koreans have sought to find meaning beyond material well-being. As long as the Roman Catholic Church provides answers that are meaningful to them, it's a win-win proposition. Even for a centuries-old institution, it appreciates like pretty much everyone else that the future belongs to Asia.

And that is your religious political economy instalment for New Year's Eve 2012. A Merry Christmas to one and all from the IPE Zone...

...O night, O Holy Night, O night divine!

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Park Geun-hye's Lump of Coal for Chaebol Haters

When it comes to showing the West how things differ in Asian nations, I suppose nothing quite beats electing a military dictator's daughter to power via freely contested polls. But that of course is just what has transpired in prosperous South Korea. And General Park is a rather revered figure for spearheading their nation's rise to the top tier (OECD) of the global pecking order culminating with the hosting of the 1988 Seoul Olympics. Park Chung-hee has set off lots of debate about the merits of authoritarian development that continue to this day. For more on the specifics from an obviously supportive POV, I refer you to my current reference on the subject matter of Korean economic policymaking during the Park era by Kim Chung-yum.

Anyway, back to the subject matter at hand. Public debate in Korea has concerned continued favouritism shown towards large Korean conglomerates known as chaebol. These were of course modelled with a few modifications on Japanese zaibatsu. Despite differences here and there, the criticisms are remarkably similar, too. Because credit and whatnot have been preferentially allocated to these mega-firms, there has not been sufficient development of young, innovative firms. Insofar as alternative SMEs would be more geared towards meeting local tastes and customs, these countries also fail to become less dependent on export markets at a time when the West is, well, kaput. Lee Byong-chul notes how, in the run up to the elections, even mighty Samsung--vanquisher of Sony, highest-rising global brand, and the only real Apple rival--came under sustained criticism:

When asked to identify Samsung’s fiercest enemy, most people would name Apple, given ongoing patent lawsuits in various countries. But Samsung, the largest of South Korea’s chaebol (vast, politically connected, family-run conglomerates), has bigger problems at home. In the run-up to the December presidential election, the chaebol have become a target of growing popular anger...

But the conglomerates’ gluttonous business practices have suffocated small and medium-size firms, stifled innovation, undermined job creation, and left much of South Korea’s population in relative poverty, while catapulting their founding families to extreme wealth. As a result, what had once been a fount of pride for South Koreans has become a source of contention.

Chaebol reform is a defining issue in this year’s presidential campaign, epitomized in popular bumper stickers reading, “It’s the chaebol, stupid.” Past presidential candidates pledged to reform the chaebol – from cracking down on corruption to restructuring corporate governance – but delivered little, instead favoring short-term political gain from maintaining the status quo. Nevertheless, many anticipate that this year’s election will catalyze change, and that the cycle of greed and corruption that is weakening South Korea’s economy will finally be broken.

For all the huffing and puffing from the presidential contenders, though, Park's reforms are expected to be more cosmetic than a real change to Korea's political economy:

[G[iven that the Saenuri Party is traditionally pro-business, Park limits her reform pledges to harsher sentences for convicted chaebol executives and new restrictions on circular equity investment through chaebol affiliates.

Not pardoning convicted executives and cutting down on cross-shareholding doesn't count as a revolution in corporate governance in my books. While you can certainly have a debate on the merits of these practices, they are ultimately not very major efforts to begin with. Timing-wise, this election was doubly critical for reformers since a new generation of chaebol leaders--drawn from their families, naturally--are coming into power. From Reuters:

The election came at a sensitive time for Samsung and Hyundai as both are in the process of passing power to a third generation of their family owners, a process that left-wing candidate Moon Jae-in could have complicated with an attack on their shareholdings, had he won. "She doesn't have any plans to alter the structures of the chaebol ownership and their concentration of economic power," said Kim Sang-jo, an economist at Hansung University and executive director of a group urging reform of South Korea's economy...

Park Geun-hye is not likely to be as irascible as her father and her policies remain sketchy. She has promised to share wealth more widely but said no new taxes on individuals or companies, and no attack on the chaebol. "It is not my aim to dismantle or bash the chaebol," Park said in July. "The main aim is to fix negative parts such as abuse of economic power and to save the positive part the chaebol have such as job creation..." 

The chaebol themselves appeared to be happy with Wednesday's outcome and the prospect of being left alone. "We want (the president-elect) to undertake lots of economic policies that help investments and job creation so that our companies can focus on reviving the economy," chaebol lobby group the Federation of Korean Industries said in a congratulatory message.

I am not entirely sure if the chaebol inevitably "crowd out" SMEs. Anyone not hiding in a cave somewhere will have noticed Korea's newfound dominance in pop culture via the "Korean Wave." Its dominance is not an accident as the state once again has a strong hand in developing entertainment talent. Importantly for this discussion, it is not chaebol who are leading the charge here but smaller outfits alike Psy's YG Entertainment and a whole host of other acronym-heavy entertainment groups.

Botttom line: Korea is the envy of all Asia and perhaps the world for its economic dynamism and exceedingly popular entertainment. Why mess with a good thing? Economies of scale matter especially in export industries, hence the continuing relevance of chaebol. During the Asian financial crisis, Kia was bankrupted. In less than fifteen years, it is one of the world's top 100 global brands. As for the SMEs, I certainly think they can apply the lessons of the "Korean Wave" in extending the state-led model of development to smaller firms. Why should it not work for them as well?

Ultimately, Park Geun-hye gives lip service to reining in the chabeol. But honestly, they seem to be doing well enough to be left alone. As with many things, you can't argue with results. In a down world economy, you cannot ask for more.

PS: You may be wondering about the title. There is the oddly routine celebration of Christmas in any number of predominantly non-Christian nations that befuddles Westerners. Go to the lobby of any major international hotel and there will be the inevitably humongous Christmas tree. While their materialistic interpretation centred on gift-giving and a festive atmosphere kind of loses out on the core irony that the saviour of the world was born in a horse's stable, I just wanted to point out that a "lump of coal" is not an entirely foreign idiom. South Korea is rapidly gaining Catholic adherents as well, but I'll keep that idea for another post which will appear near December 25.

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Would Korea Have Developed Following World Bank?

Although more than a few colleagues tend to view the World Bank in quite a negative light no matter what they do, I have come to a more ambivalent position. (Newer readers should note potential conflicts of interest since they gave me not-insubstantial prize a few years back when I was still a PhD student.) Yes, their policies tend to follow what's in vogue among American elites. Yes, their policies too have in the past been less than considerate of the particular circumstances of developing nations in attempting to transplant foreign models of development. But ultimately, I do not think that more sinister motives attributed to them hold. Rather, "America knows best" has often been combined with off-target advice for mixed results in more than a few circumstances.

Which brings me to today's post. While proctoring exams, I've had more time to read Kim Chung-yum's firsthand account in From Despair to Hope: Economic Policymaking in Korea: 1945-1979. Although it's common knowledge that the West didn't rate South Korea's chances for becoming a development success after the Korean conflict, what's starkly evident is how World Bank personnel readily lumped it in as another case of overreach. While the Pohang Iron and Steel Company (POSCO) eventually became regarded as the world's most efficient steel producer in the world, it bears remembering that it could not even avail of any lending whatsoever from the US or the World Bank at first:

[The] KISA [Korean International Steel Association] conducted negotiations with the World Bank, the Export-Import Bank of the United States (EX-IM) and other creditors from the UK, West Germany, Italy, and France, to secure financing. However, there was little progress in the negotiations. 

The world frowned upon developing countries that sought to construct an integrated steel and iron mill. At an annual general meeting of the IMF and the World Bank, this view was made clear by Eugene Black, the President of the World Bank (1949-1963), when he said (to paraphrase): “There are three myths in a developing country. The first is construction of expressways, the second is construction of an integrated steel and iron mill, and the third is construction of a monument for the head of state” [pp. 159-160].

And speaking of expressways, it should come as no surprise either that the World Bank didn't think much of them despite paving the way for South Korea's success. As ever, the best way to silence DC-based bigwigs is through success:

In light of the IBRD’s reluctance to assist in the construction of expressways, Korea pressed ahead anyway with the construction of the Seoul-Busan Expressway, the Daejeon-Jeonju section of the Honam Expressway, and the Shingal-Saemal section of the Yeongdong Expressway with its own financial resources. After Korea showed it was able to build the Seoul-Busan Expressway with its own financial and technological resources at half the time and a fraction of the cost, the IBRD began to rethink the economic feasibility of expressways in Korea [p. 312].

Other agencies also dispensed bad advice. USAID didn't help matters by far underestimating the energy requirements of South Korea:

The electricity shortage of 1967 was due to underinvestment. The initial investment proposed in the First Electric Power Development Plan had been reduced based on the recommendations of a US research team (Thomas Research Team) commissioned by US AID to conduct a study of Korea’s electricity requirements in September 1964. The study conducted by the research team concluded that the electricity demand forecasted in the First Five-Year Electric Power Development Plan during period of 1962 and 1966 was too high, recommending to the Korean government and USOM to lower the projections. As such, the downward revisions to the initial investment plans reduced electricity capacity by 224,000 KW [p. 152]. 

It's interesting to see how sceptical the World Bank was of South Korea at the outset. I do this not to poke fun at World Bank advice, but to again reinforce the point that the World Bank is ultimately just another source of input and finance among others. Ultimately, developing countries are responsible for their own development or otherwise, generally well-intentioned outsiders notwithstanding.

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Apple & Samsung: Who's Got Whom by the Balls?

[NOTE: For those who don't get the title, play this AC/DC song.] There are two broad debates going on regarding the current dominance of Samsung in the consumer electronics space. First we have the perennial question about the role of industrial policy for its success. Widely lauded for being a source of South Korea's competitive advantage during its rise to "Asian tiger" status, industrial policy was subsequently derided as a mechanism for harmful corruption during the Asian financial crisis. Surely there are those who criticize the continued state favoritism shown towards chaebol and its effective stifling of the emergence of smaller, nimbler Korean startups.
Me? I say the results speak for themselves.

Second and more interesting to me at the moment is the ongoing legal battle being waged by Apple against Samsung. At the same time that the Korean firm manufactures a number of the components used in the Apple iPhone, it makes its own line of smartphones. Samsung has been very successful in this regard, overhauling Apple as the world's largest seller of such devices in Q3 2011. Samsung's explanation for this strategy is that being a parts maker and a branded seller helps achieve economies of scale which it otherwise would not have had if it did not spread development costs to other customers. On the other hand, Apple is very much in line with the modern vision of an American "knowledge economy" firm that does not concentrate on manufacturing (the gritty stuff whose value-added tends to fall over time) but on branding and design (the glamorous stuff whose value-added tends not to fall). That is, who wants to be stuck with plant, property & equipment when they eventually become obsolete--isn't it worth a lot more "up there" in your head?

In many ways it's a next-generation debate between those who see the "knowledge economy" or a broader shift towards services as a source of comparative advantage (especially Americans) and those who perceive that industrial policy is still viable in the 21st century with tweaks here and there (especially Asians). Yet to paraphrase an ad slogan from long ago, Korea no longer practices its grandfather's reverse engineering but one wherein it sets the pace in new industries ahead of its Western competitors. It has certainly done well in this regard during the 21st century with bets that have paid off:

In 2000 Samsung started making batteries for digital gadgets. Ten years later it sold more of them than any other company in the world. In 2001 it threw resources into flat-panel televisions. Within four years it was the market leader. In 2002 the firm bet heavily on “flash” memory. The technology it delivered made the iPhone and iPad a reality, and made Samsung Apple’s biggest supplier—and now its biggest hardware competitor.

Or so the Koreans would like to think. As you know, Apple has taken Samsung to court over, indeed, copying the look and feel of its products (imitation is the sincerest form of flattery and all that):

Competitors also balk at the way that Samsung scales up quickly to supply parts to other firms as well as to price its own gadgets keenly. Supplying the rest of industry drives down Samsung’s costs yet further, with its rivals in effect financing its success. This strategy can create problems. Samsung is Apple’s most important supplier in the smartphone and tablet-computer markets. Samsung components, which include all the product’s application processors, account for 16% of the value of an iPhone. It is also Apple’s greatest competitor in those markets. Apple is now suing the socks off the company for copying the look and feel of its products. At the same time it is urgently seeking new ways to diversify its supply chain.

There may thus be limits to the symbiosis said to be going on between these firms. Apple may want to broaden its component supplier base in case Samsung tries to get back at it for legal contretemps. Meanwhile, Samsung may want to devote more attention to the software side as the hardware side of the consumer electronics equation. That is, an amount of overlap in expertise is perhaps inevitable for each to maintain competitiveness vis-a-vis each other. While the Economist views this relationship as rather unique, B-school professors Brandenburger and Nalebuff already noticed how widespread the phenomenon of "co-opetition" was back in 1997 when Steve Jobs had yet to sell a single iProduct (having just rejoined Apple). Been there, done that, saw the movie, bought the T-shirt.

Returning to the post's title, who has whom by the balls? In the short term it's to an extent mutually assured electro-destruction if either backs out in a significant way. In the long term it's probably not a question we will be asking as Apple seeks to broaden its supplier base and Samsung does what it's done many times before and moves on to other industries it deems more promising--which are not necessarily those in the consumer electronics space. Remember, Samsung was not originally a consumer electronics company. Tis but a momentary convergence of interests.

That said, the broader debate on the prospects for the "knowledge economy" which America has in large part bet its economic future on compared to those for the reworked conception of industrial policy which Asian nations have staked a claim to should be interesting to watch. Who says both cannot work--and purchase stocks of both firms to diversify one's portfolio? More importantly from a political economy perspective, which specific strategy will be most beneficial to their home nations? I've already criticized the Apple model for not doing much that is good for America, for instance.

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