Chaebol Still Drag Down Korea

Two years ago, Seoul was in a state of shock. One of the most successful economies in Asia was in deep recession, dependent on International Monetary Fund money to survive and uncertain about the future. Today, South Korea is making the jump from industrial power to digital superpower, and the pace is simply astounding. Already, 60% of the people use mobile cell phones, nearly half are plugged into the Internet, and thousands of new dot-com companies are being set up every year. High-tech exports are booming and, more important, Korea is beginning to establish its own high-tech brands around the world. Voice-activated, elegantly designed Samsung cell phones are a best-seller in the U.S.

What changed? The IMF bailout helped open up the country to new investment and new ideas. The IMF mandated the end of restrictions on foreign direct investment, and Korea opened its telecommunications sector wider than any other country in Asia. Of the $24 billion in overseas investment that has poured in since 1998, most of it has gone into information technology. Virtually every major U.S., European, and Japanese high-tech company is partnering up with a South Korean firm. IT spending jumped to 40% of total corporate spending last year and will exceed 53% in 2000. Just as important, a major entrepreneurial movement has started in Korea, with engineers and other executives leaving entrenched chaebol to begin their own companies.

Indeed, Korea is increasingly a land of two economies, one 21st century digital and one 20th century industrial. The chaebol continue to resist restructuring, and the banks continue to keep them afloat. This, of course, means less capital to finance Internet startups and other new high-tech companies. The Korean stock market is already under pressure from the debt-ridden chaebol sector and is down 34% for the year. The high-tech Kosdaq sector is down even more--60%--as investors worry about profitability.

Korea can't count on the Internet to break up the stifling chaebol. The government itself must pressure the banks to cut back their lending to the chaebol and rechannel loans to Korea's promising New Economy companies. The longer it procrastinates, the longer the transition will take.