The mounting corruption scandal in Korea presents a serious challenge to the state capitalist model that was once so appealing in Asia. Coming on the heels of the scandal at Daiwa Bank Ltd. in Japan, where bureaucrats closely linked to the bank officials deliberately hid serious problems for months, the Korean bribery case highlights the problems that derive from heavy government regulation of an economy.
For a time after the Mexican crisis last year, some Asians gloated--saying that the market capitalism of the U.S. was unsuited to other nations. Perhaps, but now it's the bureaucratic capitalism prevalent in Asia that may be in trouble.
So far, 33 leaders of Korea's chaebol have been summoned to testify about bribing government officials for political favors and government contracts. In the end, it appears that former President Roh Tae Woo may have to accept the guilt of the entire system and be sent to jail.
But it is the system that is on trial. There is a heavy blanket of regulation lying over the Korean economy. Korean department stores, for example, need government approval even to launch a bargain sale. To move through this regulatory system, Korean businesspeople use bribery. It is a heavy cost of doing business.
But the price for the economy is much higher. The chaebol-government domination of Korea has led to a sharp decline of midsize businesses throughout the country. At one point, they were the hope for the innovation and flexibility that big conglomerates lacked. No longer. The chaebol themselves have been masters of organizing labor and capital to compete against the Japanese and other players in the global marketplace. But in a new economic era dominated by information and creativity, size counts for much less. Indeed, it may work against growth.
Certainly the heavy hand of regulation and bureaucracy hampers innovation. China is already catching up with Korea in producing commodity-type goods. In 10 years, it will be manufacturing and exporting cars, steel, and ships--as well as chips and computers. There is no way Korea can compete on price. It will have to move up the value ladder into the Information Age. In that arena, the heavy hand of government regulation is suffocating, as is the use of corporate bribery to do business.
Now is the time for Korea and Japan to open their economies to market forces and let competition, not connections, dominate economic change. The old model isn't working.