Growth Not Missile Threat Tops Park's South Korea Agenda

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Photographer: Ahn Young-Joon/Getty Images

South Korean President Park Geun Hye, the nation's first female leader, is encouraging startups and entrepreneurs to boost growth and employment.

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Photographer: Ahn Young-Joon/Getty Images

South Korean President Park Geun Hye, the nation's first female leader, is encouraging startups and entrepreneurs to boost growth and employment. Close

South Korean President Park Geun Hye, the nation's first female leader, is encouraging startups and entrepreneurs to... Read More

Photographer: Jean Chung/Bloomberg Markets

South Korea's Senior Presidential Secretary for Economic Affairs Cho Won Dong says China looms as one of his nation's biggest concerns. He is steering the country's new approach to jobs growth. Close

South Korea's Senior Presidential Secretary for Economic Affairs Cho Won Dong says China looms as one of his nation's... Read More

Photographer: Dan Pak/Bloomberg Markets

Bang Hyun Woo, at left, and Heo Yun Sil create art using digital technologies in their attic home office in Seoul. Close

Bang Hyun Woo, at left, and Heo Yun Sil create art using digital technologies in their attic home office in Seoul.

With North Korea escalating its threats to test a ballistic missile, South Korean President Park Geun Hye was conferring with Bill Gates on another pressing matter. Seated across from Microsoft Corp.’s billionaire co-founder on April 22 at a formal dining table in the Blue House, her official residence, Park picked the tech mogul’s brain about how to nurture entrepreneurs to keep the world’s 15th-largest economy humming.

“If there are more people like you, we will be able to create the world we dream of,” Park, 61, told the smiling Gates.

By most measures, South Korea has already implanted itself among the globe’s economic success stories, Bloomberg Markets magazine will report in its July issue. The one-time agrarian backwater has emerged as an icon of manufacturing, technology -- and cool.

More from the July issue of Bloomberg Markets:

Fifty million people have defied geography and history, rebounding from a 35-year Japanese occupation and the Korean War to create a thriving capitalist democracy along the world’s most heavily fortified border. South Koreans in 1970 earned an average of $254 a year -- less than the $435 earned by their North Korean brethren. Last year, they averaged $22,708.

Overseas investors are embracing South Korea. They bought 55.6 trillion won ($49.2 billion) more Korean stocks and bonds than they sold in 2012.

The benchmark Kospi Index (KOSPI) has doubled to 2,001.20 as of May 29 from October 2008, when the subprime crisis roiled global markets.

Chaebols Rule

Family-controlled conglomerates known as chaebols, cranking out memory chips, liquid-crystal-display screens and tablet computers, have made Korea the seventh-largest exporting nation.

Samsung Group sells more smartphones than Apple Inc., while Hyundai Motor Group, once known for unreliable cars, is aiming at Bayerische Motoren Werke AG in luxury vehicles. Sales of the top 30 chaebols equaled 82 percent of South Korea’s $1.12 trillion gross domestic product in 2012, up from 53 percent in 2002.

Seoul, the work-obsessed capital of 10.4 million, is the epicenter of the buzz. Workers whose parents once toiled in uniforms making wigs and toys flock to office towers sporting Chanel and earbuds, traveling there in subways equipped with free Wi-Fi.

‘Pali, Pali’

The world’s most-wired country runs on “pali, pali” or “quickly, quickly,” as people in cafes along Garosu-gil Street swap quips or compete in a one-minute game called Anipang on ubiquitous mobile phones. Aspirations are soaring as parents hire English tutors for their children while indulging in plastic surgery for themselves in the Gangnam neighborhood south of the Han River. K-pop hits, soap operas and “Gangnam Style,” rap artist Psy’s record-setting video spoof of over-the-top consumption, spread the vibe worldwide.

“Korea is going through a renaissance,” says Richard Min, a Korean-American who moved to Seoul from Boston in 2000 and co-founded technology incubator Seoul Space Inc. “It’s cool to be Korean.”

Park, the Republic of Korea’s 11th president and its first female leader, is striving for more than coolness. The daughter of late President Park Chung Hee, the military strongman who championed the country’s industrial chaebols, says that to sustain growth, South Korea must move beyond those conglomerates and encourage small businesses.

‘Radically New’

“The past economic model designed to catch up with advanced economies drove Korea’s rapid growth, but it has lost steam,” Park told Bloomberg Markets in a written reply to questions.

She seeks to add 2.5 million jobs during her five years in office -- 410,000 of them in areas overseen by her cumbersomely named Ministry of Science, ICT and Future Planning. (ICT stands for Information and Communications Technology.) She plans tax incentives for entrepreneurs and venture capitalists and an alternative stock market to help companies raise money.

“The president’s drive to create new jobs started from a humble realization that we need to do something radically new,” says Cho Won Dong, the president’s senior secretary for economic affairs, discussing Park’s strategy in his office near the Blue House.

Min, for one, is pumped.

“President Park Geun Hye has decided creativity and innovation are the new keywords,” the 39-year-old says. “If we grow the way Koreans love to grow, there is no reason why we can’t be bigger than Silicon Valley.”

Park’s Mission

Dual forces lend urgency to Park’s mission: Korea’s aging population and falling birth rate and the economic dynamics of its neighbors.

While much of the world assumes that the South’s most-vexing challenge is North Korea’s volatile new leader Kim Jong Un, South Koreans themselves worry more about finding good jobs and staying economically competitive with the real giant to the north -- China, the No. 2 global economy. They are also looking anxiously at Japan, the country that China eclipsed, as Prime Minister Shinzo Abe drives down the yen.

Sixty years after the armistice that formally ended hostilities between the two halves of the Korean peninsula, only 15 percent of Southerners said North Korea was a priority, a February survey by Seoul’s Asan Institute for Policy Studies found. Their top concerns were reducing household debt, in which South Korea ranks eighth in the world when measured against disposable income; lowering the 8.4 percent youth unemployment rate; and remaining in the middle class.

Creative Economy

Women, who are paid 39 percent less than men for the same job, are hoping Park will narrow an income gap that was the highest among 34 Organization for Economic Cooperation and Development members.

Park says the ticket to expansion is a creative economy underpinned by entrepreneurs and venture capitalists.

“Growth led by a few big firms and the government is bound to be limited,” she told policy makers in April.

While Park is only now unrolling the details, investors like what they have seen so far.

“President Park’s goals are very good and, if achieved, will take Korea to the next stage,” says Mark Mobius, executive chairman of Templeton Emerging Markets Group, who oversees more than $50 billion in emerging-markets equities, about 4 percent of them Korean stocks.

China Looms

Park has her work cut out for her. The boom that has allowed people to splurge on luxuries is ebbing. One immediate challenge is a slowdown in China, which has become the largest buyer of South Korean exports. Longer term, China, with a research and development workforce of 2.3 million -- seven times greater than South Korea’s -- looms as a formidable competitor.

“China has no fear of Korea anymore, so we now have to come up with something different,” says senior economic secretary Cho, 56, who has a doctorate in economics from the University of Oxford and who served on former President Kim Dae Jung’s economic team during the Asian financial crisis in 1998. “President Park Geun Hye’s solution is a creative economy.”

South Korea’s economy expanded by 2 percent last year, the slowest pace since the 0.3 percent rate in 2009. The central bank has twice this year cut 2013 projections, with the estimate of 2.6 percent on April 11 a downgrade from its initial forecast of 3.2 percent.

Aging Koreans

Park is mindful of her country’s demographic time bomb. The population is aging at the fastest pace of any advanced nation, the OECD says. The available workforce will dwindle starting in 2017. By 2026, one of five Koreans will be 65 or older, a level the U.S. won’t reach until a decade later, Statistics Korea says.

Already, the middle class is shrinking and people are falling back into poverty as the division between rich and poor widens. The top 20 percent of South Koreans earn more than five times as much as the bottom 20 percent.

Park aims to have 70 percent of South Koreans in the middle class, with incomes that range today from $18,500 to $55,500, by term’s end. She wants more Koreans to work, too. Her goal is to employ 70 percent of people ages 15 to 64, up from 64.2 percent in 2012.

“The new administration seeks to establish an economic system characterized by a virtuous cycle of growth, employment and distribution,” Park told Bloomberg Markets.

Happiness Fund

The president administered an economic booster shot in April. She unveiled a 17.3 trillion won supplementary budget, the largest of its kind since the Asian financial crisis. She created the so-called National Happiness Fund to help low-income earners consolidate or refinance household debt, which totaled 959 trillion won, equal to 136 percent of disposable income at the end of 2012.

Park took her campaign for a creative economy to the U.S. in May. Stopping in New York, she extolled the late Korean video artist Nam June Paik.

“The U.S. invented the video,” Park told supporters at the Waldorf-Astoria Hotel. “Japan provided it to households. Korea made it art.”

At a White House meeting, Park and President Barack Obama pledged to form a united front against North Korea’s threats. She told the U.S. Congress she would “write a sequel” to Korea’s transformation story.

Accompanied by a 51-member economic delegation that included Samsung Chairman Lee Kun Hee and Hyundai Motor Chairman Chung Mong Koo, Park met U.S. business leaders on May 8. In Los Angeles, she brainstormed with Jennifer Yuh Nelson, the Korean-American director of “Kung Fu Panda 2;” venture capitalists; and executives. She took advice from a participant to invest in a yet-to-be-determined U.S. venture capital fund, which would in turn invest in Korean startups.

Apple, Google

“Hopefully, we can create another Apple or Google on Korean soil,” says economic adviser Cho, who accompanied the president to the U.S.

Park’s entrepreneurship drive will be difficult in a country still dominated by conglomerates, says Bruce Cumings, a history professor at the University of Chicago.

Led by the chaebols, Korea’s economy has expanded every year in the past five decades except for two: 1980, during the oil shock, and 1998, amid Asia’s financial crisis. Outbound shipments by the 30 largest companies accounted for 84 percent of South Korea’s exports in 2010.

“Corporate bigness has been a key to Korean success, and the most successful chaebol, Samsung, now rivals Apple,” says Cumings, who has written nine books on Korea, including “The Korean War” (Random House, 2011). “Samsung’s prowess is not exactly an argument for small-bore entrepreneurship.”

Fewer Jobs

Choi Seok Won, head of the research center of Hanwha Investment & Securities Co. in Seoul, counters that many chaebol jobs don’t benefit Koreans. The overseas production of Korea’s large manufacturers jumped to 16.7 percent of their total output in 2010 from 6.7 percent in 2005. Hyundai builds cars abroad, and Samsung Electronics Co. plans a Palo Alto, California, campus complete with startup incubator.

“Chaebols are phenomenally successful, but they no longer create jobs at home,” Choi says.

Chaebols also have acquired a reputation for bending the rules, says Shaun Cochran, head of Korea research at Hong Kong-based brokerage CLSA Asia Pacific.

“People in Korea don’t trust the power structure at the top because of a long history of leaders with special exemptions,” he says. From 1990 to 2012, the heads of seven of the 10 biggest chaebols have been sentenced to prison for bribery, embezzlement and tax evasion. None spent more than a few months behind bars.

‘Full Circle’

“If Park Chung Hee’s legacy was nurturing the chaebols, it is his daughter’s chance to come full circle,” Cochran says. “She has to turn her back to close relationships her father had. She has to stand up and say those days are over.”

While Park’s policies regarding the chaebols are still evolving, she has shown backbone in dealing with the North. In April, North Korea threatened to rain nuclear missiles on South Korea and the U.S. and removed 53,000 workers from the Gaeseong industrial zone -- a jointly run operation just north of the border and the only existing symbol of Korean cooperation. After the North rejected talks, Park ordered all South Koreans to leave the complex, determined not to succumb to pressure designed to extract concessions.

“The Republic of Korea will never accept a nuclear-armed North Korea,” Park told the U.S. Congress in May. “Pyongyang’s provocation will be met decisively.”

Less than two weeks later, North Korea test-fired six short-range missiles in defiance of international sanctions. Park’s approval rating rose to about 56 percent in mid-May from 45 percent in late March.

Father’s Determination

John Linton, a medical doctor who was born in South Korea to American parents, says Park’s determination reminds him of her father’s.

A fourth-generation resident, Linton, 53, lived through South Korea’s transition to democracy from dictatorship and was a teenager when two tragedies befell the Park family. In 1974, Park Chung Hee was speaking at the National Theater of Korea when a North Korean agent named Mun Se Gwang opened fire. He killed First Lady Yuk Young Soo while aiming for the president. In 1979, Park Chung Hee was assassinated by intelligence chief Kim Jae Kyu for reasons that remain unclear.

Linton talked with Park Geun Hye in 2002. She had just returned from Pyongyang, where she met Kim Jong Il, the current dictator’s late father. Linton asked how she could have visited the man who engineered her mother’s assassination. Park looked at him coldly.

“My family’s interest is my family’s interest, and my country’s interest is my country’s interest,” he recalls her saying. “They are different.”

Industrial Powerhouse

Park Chung Hee, a major general in the South Korean Army, spearheaded Korea’s growth into an industrial powerhouse. From 1961 to 1979, he showered the chaebols with loans and tax breaks. In 1972, he unveiled a new constitution that increased a president’s tenure and removed limits on re-election, marring his legacy. Students protested, and opposition leader Kim Dae Jung decried the move.

Kim, who died in 2009 at 85, became president in 1998. He won the Nobel Peace Prize in 2000 for his pro-democracy campaigns and work toward a historic inter-Korean summit.

Now, the strongman’s daughter is unveiling incentives for the next wave of Korean businesses.

Encouraging Entrepreneurs

For companies three years old or younger, she’s expanding tax breaks for angel investors and establishing a government-run Future Creation Fund, which, along with private contributions, will hold 200 billion won of seed money. She plans tax incentives to sellers or buyers of companies that are four to nine years old and a similar 300 billion won fund.

For firms 10 to 15 years old, Park is proposing a stock market called the Korea New Exchange, or Konex, for capital raising. It would supplement the Kosdaq (KOSDAQ), Korea’s version of the tech-heavy Nasdaq.

“As a government, we cannot create creativity but an environment where startups can thrive,” says Choi Mun Kee, 62, the new science and ICT minister.

Choi, as president of the Electronics and Telecommunications Research Institute, laid the foundation for Korea’s mobile phone industry.

“Entrepreneurs are going to be encouraged to take risks, allowed to fail and get another chance, raise capital easily and exit through mergers and acquisitions,” he says.

Failure’s Price

The price of failure is high in South Korea. A business owner has little chance of rebounding from bankruptcy. Korea’s small and midsize companies raised 99 percent of their combined 472 trillion won of capital through loans last year, the government says.

“If you start a business and fail, that failure sticker will be with you for the rest of your life,” says Daniel Shin, founder of TicketMonster Inc., South Korea’s biggest shopping-deal website. He says Koreans define success as being a doctor or a lawyer, not an entrepreneur.

Choi wants to fight that perception by celebrating such startups as KakaoTalk, a free messaging service for smartphones with 88 million worldwide users. Seated in his office among framed commemorative stamps of Psy, Choi also praises Golfzon (121440) Co., creator of a virtual golf game that simulates outdoor courses, and Delight Co., which developed a hearing aid using a 3-D printer.

Silicon Seoul

The government, with its history of intervening in the economy, has a good chance of sparking a Korea-style Silicon Valley, CLSA’s Cochran says.

“Korea is one environment that is able to bring together a large number of industries,” he says. “The government will get behind it, the banks will get behind it, and the companies will get behind it.”

Park, like her predecessors, keeps a wary eye on the region’s dominant forces: China and Japan. South Korea is eager to avoid the fate of Japan, which emerged as an economic superpower in the 1970s and 1980s on the strength of its exports. After the Plaza Accord of 1985 led to a surge in the yen’s value, the central bank cut interest rates, spurring speculation in real estate and stocks. The bubble popped in the early 1990s when the Bank of Japan lifted short-term interest rates. Ever since, Japan’s economy has stagnated even as interest rates have fallen to virtually zero.

Japan’s Moves

Abe, who took office in December, announced $100 billion in extra government spending and appointed a central bank governor who has vowed to pour money into the financial system to end Japan’s lost decades.

One pillar of Abenomics is an effort to drive down the yen to help Japan’s beleaguered exporters. The currency fell 18.9 percent against the U.S. dollar and 15.1 percent against the won in the six months through May 29, sparking concern in Korea and hurting its exporters.

“Compared with the North Korea risk, a sliding yen is having a considerable impact on the real economy,” Finance Minister Hyun Oh Seok told Bloomberg News on April 18.

China’s newly confident companies are hurting Korea’s exports with sheer competition. China has relegated 10 once-dominant export items, including petrochemicals, to second or third, the Korea International Trade Association says.

“In five to 10 years, China will have its technology, labor market and consumer market and will no longer need Korea,” says Ted Chung, chief executive officer of Hyundai Card Co. and Hyundai Capital Services Inc. “We have to think about our next economic model -- ultimately, what kind of a country we want to make.”

Chung, 53, sees promise in biotechnology and in combining information technology with South Korea’s auto and other established industries.

Gender Inequalities

South Korea’s women are hoping that any new economic model will mean more opportunities for them. Park got an unwanted reminder about the difficulty of addressing gender inequalities during her U.S. visit. A Washington-based intern accused the president’s top spokesman, Yoon Chang Jung, of fondling her in a hotel. Park fired him and apologized to the public amid front-page stories in the Korean press. Yoon denied the accusations.

Kim Sung Joo is the rare woman who has made it to the top despite discrimination. In her case, Kim says, the bias was from her own father. Kim Su Geun, who headed energy conglomerate Daesung Group, favored his sons and expected his daughters to finish college and accept an arranged marriage. Kim says her father disowned her after she sought further education in the U.S. and wed the man of her choice.

Today, Kim, 56, calls herself a left-wing chaebol owner: Her luxury handbag company, MCM Holdings AG, is succeeding in a male-dominated society, and she devotes 10 percent of annual profits to train female business leaders and support North Korean defectors.

Little Guy

Park’s effort to build small companies reflects not only an economic strategy but also empathy for the little guy -- a trait she shares with her late mother. Park was 9 when her father grabbed power from Prime Minister Chang Myon in a 1961 coup and she and two younger siblings moved to the Blue House. First Lady Yuk Young Soo established a foundation for children’s welfare that ran a kindergarten and a science center. She once brought a young beggar to the presidential house to feed and bathe him, according to Park’s autobiography, “Steeled by Despair, Motivated by Hope.”

Park was studying French in Grenoble, France, when her mother was killed. At 22, she adopted the role of first lady, hosting U.S. President Jimmy Carter in June 1979. Four months later, Park’s father was assassinated. General Chun Doo Hwan took over and ruled until 1988, when he handed power to Roh Tae Woo.

Quitting Spotlight

Park retreated from the spotlight. The hardest thing was hearing loyal friends calling her father a dictator, she wrote in “Steeled by Despair.” She turned to Buddhism, meditation, reading and writing. She led the child-welfare foundation named for her mother and received 600 million won from her father’s estate. She never married. Visitors to her house in 2002 were surprised to see an old TV and faded wallpaper, according to “Solitary Leadership” by Chun Young Shik.

Park entered politics in 1998 as the financial crisis rocked Asia. Thailand, struggling with current-account deficit and a property bubble, abolished its currency’s peg to the dollar, causing the baht’s collapse and a chain reaction in Malaysia, Indonesia and South Korea.

South Korea’s economy, which had expanded at an annual average rate of 8.7 percent from 1980 to 1990, shrank 5.7 percent in 1998. Foreigners pulled out capital, businesses went bankrupt, and interest rates soared to 30 percent. The won plunged to a record low of almost 2,000 to the dollar in 1998. On May 29, it was trading at 1,133.

Deepest Recession

The country fell into its deepest recession since the war, threatening growth lauded as the Miracle on the Han River, after the waterway that bisects Seoul. Koreans rallied. When the government sought a $57 billion bailout from the International Monetary Fund in December 1997, citizens turned in gold jewelry to reduce the loan. The country fully repaid the IMF in August 2001, almost three years early. The economy grew 10.7 percent in 1999.

Park won parliamentary elections beginning in 1998. She became leader of the Grand National Party, which traces its history to her father’s era, in March 2004. To defuse public outcry over an alleged bribery scandal involving the party’s 2002 presidential candidate, Lee Hoi Chang, she moved the headquarters from Seoul’s Yeouido financial district to a makeshift tent.

Face Slashed

Park almost lost her own life in 2006. She was campaigning in Seoul when an ex-convict who later said he was seeking attention slashed her face with a box cutter. It was a miracle that the 11-centimeter (4-inch) gash on her right cheek didn’t touch the carotid artery, doctors told her after the attack.

Last December, Park defeated Moon Jae In in the presidential race, winning 51.6 percent to 48 percent. Donald Gregg, U.S. ambassador to South Korea from 1989 to 1993, says Park has adopted traits of her father and her mother.

“The new president has inherited both her parents’ best qualities: her father’s tenacity and intelligence and her mother’s grace,” says Gregg, who knew Park’s parents and met with her several times.

Soon after she was elected, Park visited alleys behind Seoul’s East Gate Market, where extreme poverty still exists in the thriving capital. The odor of urine from shared toilets permeates this area, where rooms just big enough to lie down in cost 180,000 won a month.

Eventual Reunification

“President Park came here with a lunch box and distributed butane gas for cooking,” says Lee Hak Soon, 74, who left North Korea during the war and settled in East Gate Market 44 years ago. “She reminded me of her mother.”

As South Koreans adapt to Park’s creative economy, some envision an even larger boom triggered by reunification. Thirty or 40 years after the Koreas reunite, their combined GDP could exceed that of France, Germany or Japan, predicts Kwon Goohoon, Goldman Sachs Group Inc.’s chief economist for Korea.

Andrei Lankov, a professor at Seoul’s Kookmin University, says merging the two Koreas will be jarring and painful.

“Many South Koreans dream of gradual, managed unification, but in all probability, when the change does come, it will be dramatic and unpredictable,” he says.

For now, the North, even with its bellicose leader whom many people believe hasn’t yet turned 30, doesn’t faze a new crop of businesspeople returning to Korea.

‘Best Time’

“It is the best time ever to be in Korea right now to try and be an entrepreneur,” says David Lee, a Korean-Canadian who came back to Seoul and founded video-editing company Shakr Media.

The experience of Shin, the 27-year-old Korean-American who started TicketMonster, shows hurdles still exist. He quit his consulting job at McKinsey & Co. in New Jersey to form his company. In Korea, he faced resistance when he tried to persuade a chaebol executive to offer a promotion on the shopping-deal site.

The executive wanted to know why a young man with a degree from the University of Pennsylvania’s Wharton School was deviating from his McKinsey career. He said if his son took such a path, he’d be very disappointed, Shin recalls. Shin sold TicketMonster -- valued at $300 million at the time -- for an undisclosed amount to LivingSocial Inc. in Washington in 2011.

Creative Couple

Husband-and-wife duo Bang Hyun Woo and Heo Yun Sil embody the creativity Park aims to unleash. Heo, 34, quit her job in 2007 as a mobile phone designer at LG Electronics Co. and formed Everyware Co. Bang, 34, has a Ph.D. in mechanical engineering.

The couple makes artworks that incorporate touch, sound, smell and sight. Viewers brush a blank canvas that changes color or throw balls at glass that seems to shatter. A TV takes photos to share on social networks. Samsung Everland Inc., SK Telecom Co. and Samsung Electronics have collaborated on several projects.

“We see limitless possibilities in technology and design to give joy to people,” Heo says.

In their attic home-office atop a rundown Seoul building, Heo and Bang are doing just what Park says South Korea requires to expand its economy and keep China at bay.

“Korea is pushing to make a transition to a pace-setting economic system by realizing a creative economy that will generate new added value and create jobs,” she told Bloomberg Markets a week after releasing her blueprint for small businesses.

In Park’s view, the South Korea that arose as an industrial giant under her father has the potential to become the next Silicon Valley.

“One person can change the world, like Bill Gates and Steve Jobs,” she told top officials at the Blue House on April 18.

So says the general’s daughter, the latest leader of a country that has survived war and privation and developed a decades-long habit of outsmarting its neighbors and confounding expectations.

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To contact the reporter on this story: Yoolim Lee in Singapore at yoolim@bloomberg.net

To contact the editor responsible for this story: Laura Colby at lcolby@bloomberg.net

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