South Korean President Kim Young Sam has a rare opportunity to turn adversity to advantage. The spectacular collapse of South Korea's 14th-largest business group, Hanbo Steel & General Construction Co., with nearly $6 billion in debt, casts a harsh spotlight on the country's financial system and has prompted opposition attacks on the integrity of those close to Kim. Hanbo's feverish growth owed more to founder Chung Tae Soo's ability to exploit his political connections in order to get loans than it did to business acumen. Like too many Korean companies, Hanbo grew because of who its executives knew rather than what they could do.
The government continues to clutch the reins of the financial system, for dispensing loans to friends and denying them to enemies is the most important way it controls business. But this sort of backroom dealing, which served the country well enough when it was playing catch-up, is now hobbling the ability of its businesses to compete. Most loans go to large chaebol, the business groups that dominate the Korean economy, although their profitability is for the most part minimal. Capital for startup ventures remains hard to come by, and entrepreneurs in South Korea are a rarity. Yet Confucian-based societies--of which South Korea is one--have entrepreneurial spirit as a core value.
Kim Young Sam has presided over important reforms, but he has been timid in reforming the financial sector. The government remains far too intimately involved in all aspects of finance--from influencing the appointment of bank management to restricting overseas borrowing. Public ownership by any single shareholder is limited, so there is little incentive for companies to be accountable to shareholders. The government can accomplish some reforms by decree, others through legislation. But reform it must: With a sputtering economy and a record trade deficit, it's time to let the marketplace allocate capital, not government bureaucrats.