South Korea: One Big Step Backward

The good news is that South Korea is rebounding from Asia's deep economic crisis faster and stronger than anyone anticipated. Growth in 1999 could hit 5.5%, just about compensating for last year's decline. The bad news is that the recovery is taking the steam out of the government's reform movement. The effort to revive the economy by reducing the role of the giant conglomerates and increasing foreign ownership of banks is faltering badly. Without breaking the close ties between the chaebol and banks that finance them, Korea will run the risk of building excess capacity all over again. Its industries will have difficulty moving quickly enough in the digital age. And its young entrepreneurs and engineers will increasingly flee to Silicon Valley.

Three key sales are in trouble. Korea First Bank was ready to be sold to Newbridge Capital Ltd. months ago, but pressure from government bureaucrats and chaebol executives have put that deal on hold. Afraid they will see their credit cut off, these chaebol officials apparently want to keep the bank in Korean hands. The government says it wants a higher price now that the economy is turning up. But many believe the deal is dead.

HSBC Holdings PLC's takeover of Seoulbank looked like a done deal earlier this year. Now, it too is in limbo, thanks to Seoul's financial mandarins. The bureaucracy is also refusing to accept the market price for Korea Life Insurance Co. In the second auction for the company, the government rejected eight foreign bids.

Finance Minister Kang Bong Kyun still insists that the government plans to sell distressed banks to foreigners. But that apparently doesn't mean that a free marketplace will be allowed to work. In the end, no price paid by foreigners may prove adequate to meet the growing protectionist and nationalistic demands of Korea's bureaucratic and corporate elites.

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