Swing by the high-fashion enclave of Chongdamdong on any Saturday night, and you'll see the affluent twentysomethings of Seoul chattering away on their pastel-colored mobile phones. Chic Korean women float by, bedecked in Chanel, Hermes, and Gucci. Later on, the dance clubs throw open their doors, making the very sidewalks reverberate into the early hours. Everywhere, you see billboards and posters proclaiming the coming World Cup, which South Korea is hosting with Japan. The planet's biggest sporting event is an excellent excuse to throw a nationwide party. The question is whether the Koreans will notice. Their party has already started.
To foreigners who know the ravages that the Asian crisis inflicted on Seoul, it's hard to believe this is the same capital that sprouted tent cities and soup kitchens in 1998. Or the town that, for decades, maintained a rigid culture of conformity, drudgery, and xenophobia. Koreans are rubbing their eyes, too. When 47-year-old Eric B. Kim returned to Seoul in 1999 to head marketing for Samsung Electronics after 32 years in the U.S., he felt a bit like Alice after falling through the rabbit hole. "The old hierarchy was gone," he says. He thought his two children would find Korean culture stifling. Instead, they think Korea is almost as much fun as--brace yourself--Southern California and the U.S. East Coast, where they grew up. "Koreans," says Kim, "are thriving on change."
The changes have been pretty much nonstop since the economic trauma of 1998, when gross domestic product contracted 6.7%. Today, Korea is back with a vengeance. Its economy grew 5.7% in the first quarter. Its phones, cars, and movies are hot around the world. Its citizens are riding a high verging on cockiness.
Dare we say it? Korea is cool. This country of 48 million has become a model for developing nations everywhere. Nowhere is this more true than in its home region, where Japan is a waning force and much of Southeast Asia continues to struggle with sick banking systems and dwindling foreign investment. The commentators may be right that the future belongs to China--and that Korea itself still needs to keep reforming. But Korea has already made the transition from authoritarianism to democracy and from a low-end, exporting economy sealed off from the world to one that is plugged-in, dynamic, and increasingly high-tech. It will be some time before China gets there.
Many other Asian nations, looking on enviously, see in Korea what they can only dream of: a budget surplus, $107 billion in foreign-currency reserves, a rising credit rating, and a jobless rate of 3.1%. The Korean stock market is among the best-performing in the world. Some $52 billion worth of foreign direct investment has poured into the country during the past four years, vs. $24.6 billion over the past three decades. Compare that to the situation just before the crisis, when the KOSPI index was crashing, exports and dollar reserves were collapsing, and foreign investors fleeing, and you'll get a sense of how much has changed.
How did crisis-afflicted Korea transform itself? Will it keep its prosperous new model alive? Answers to those questions provide a clue to how a country can really change, and whether Asia needs to follow the Korean way to a new level of economic flexibility and vitality.
The answer to that first question is complex. First, President Kim Dae Jung and his advisers managed to cut the connection between Korea's banks and the chaebol, the conglomerates that once ruled Korea. Second, the Koreans created an economy that did not depend exclusively on exports to survive. They fashioned a full-fledged domestic economy, a rare thing in Asia. Third, the trauma of crisis and change unleashed a wave of innovation in business and culture that is still in effect.
Much of this wouldn't have happened without the administration of President Kim--although these days, his own electorate doesn't give him much credit. The longtime political reformer, who endured assassination attempts, jail terms, and years of exile, had been waiting half his life for the opportunity to lead his nation in a new direction. When he finally made it to the presidency in 1998, Kim and his lieutenants realized that the crisis, although painful, offered an historic opportunity to overhaul Korea's economic model. Says the President: "You have to endure until the structural changes are complete. In this age of globalization, you have to accept that only profitable and competitive companies survive."
Kim & Co. ordered the overextended, state-backed conglomerates known as chaebol to go on a crash corporate diet, slash their debt, swap noncore businesses, and sell off others. "The chaebol served as a convenient whipping boy that could be blamed for the crisis," says Chung Hoon Mok, a former director of the World Bank, which, along with the International Monetary Fund, helped Korea with a $30 billion bailout package. Using the IMF's demands for reform as political cover, the government pressured chaebol chieftains to cut their empires down to size. At the same time, the administration threw open the economy to foreign competition and investment. Now, says Deputy Prime Minister and Finance Minister Jeon Yun Churl, "even hostile mergers are allowed."
Today, Korea's business landscape stands radically transformed. Of the 30 biggest chaebol, 16 have been shut down or radically downsized. The survivors--companies such as Samsung Group and LG--barely resemble their former selves. Of the 2,100 financial institutions cluttering the banking industry in 1998, just 1,600 are now standing. Of 24 major city banks, only half remain. Imagine such ruthless restructuring in Japan.
With many of the chaebol gone, the newly vital banks had billions in capital freed up for new loans. Korean consumers and small businesses, starved of money for decades, finally had the liquidity they so desperately needed. With banks free to lend to whomever they want, small and midsize startups have proliferated; since 1998, 11,396 have popped up. Says Yang Ki Gon, president and CEO of Bellwave Co., a small mobile-phone maker: "New startups like us give dynamism to the economy."
At the same time, banks are lending to consumers through credit cards and mortgages, setting in motion a spending boom that is giving the economy a healthier balance between exports and domestic-led growth. This new economy has already shown its strength: Last year, when the rest of Asia was flat on its back after the U.S. economy swooned, the Koreans chugged on, producing a respectable 3% gain in GDP during a hard year.
The change in the way Koreans deploy capital seems to fit perfectly with a shift in the way Koreans think about themselves. It's as if a whole new Korean value system has emerged. The crisis unleashed pent-up entrepreneurial energy. The most promising trends--the rapidly expanding information-technology sector, a more fluid labor market, a better balance between export-led and home-driven economic growth--are being fueled from below by consumers instead of being orchestrated by bureaucrats.
Indeed, the whole notion of success in Korean society has come in for serious revision. Making a quick fortune in business and finance is no longer viewed as suspect or even criminal. Nor do Koreans covet entry-level jobs at the biggest corporate names in Korea--the Samsungs, the LGs, the Hyundais. In such companies, "people think and behave in a uniform manner. I hate it," says Jo Seong Hun, 31, a manager at the merger-and-acquisition firm SYM & Associates. Today, many young Koreans want to work at companies such as MP3 maker Digitalway, or NCSoft, whose online medieval-fantasy game Lineage has a cult following among global gamers.
The desire to create has spilled over into popular culture, which is becoming increasingly accessible to overseas audiences. Sixteen-year-old teen pop diva BoA's first album, Don't Start Now, has dominated the charts in Japan this year. The male dance duo Clon rules in Taiwan. And H.O.T., a boy band that blends hip-hop, R&B, and dance music, is big in China.
In film, producer Shim Jae Myung made a splash two years ago with his smash hit Joint Security Area, a North-South military drama that drew 6 million viewers at home and did well in Japan. Korea's domestic film industry has doubled its annual box-office revenues, to more than $380 million, since 1997, and now boasts a 51% share of the market. "I used to think Korean films were a waste of time," says Lee Jee Min, 24, who works at SEI Asset Korea, a fund manager. "But they are pretty good these days." Walt Disney Co.'s Miramax Films (DIS ) unit recently paid $1.1 million for the rights to remake a Korean film called My Wife Is A Gangster. "We hope the boom in the movie industry will spread to other content businesses," says Park Byoung Woo, deputy director at the Culture & Tourism Ministry's Film & Video Division, which provides seed money for new films.
Korean celebrities are being wooed by Asian companies looking for spokespeople. TCL, a Guangdong-based mobile-phone maker, for example, has been featuring the hot Korean actress Kim Hee Seon on billboards in major Chinese cities. TCL signed the 26-year-old heartthrob to a two-year modeling contract worth $1.2 million, plus production expenses.
It's not just Korean culture that is winning newfound respect. In the U.S. and other markets, Samsung consumer electronics and Hyundai nameplates are no longer a fallback for those who can't afford a Sony (SNE ) or Toyota (TM ). A decade ago, Samsung barely registered as a global brand. Now, it's going head to head with Sony Corp. and Nokia Corp. for leadership in high-end, Internet-surfing mobile phones, digital televisions, MP3 players, liquid-crystal displays, and the like.
While Korean companies were content to pump out uninspired knockoffs before, they are now producing cutting-edge products. At Samsung, Chairman Lee Kun Hee launched a design revolution, in part by bringing in former IBM design wunderkind Tom Hardy to get designers thinking outside the box. Key Samsung designers also worked with the U.S. firm Sapient to clear out the cobwebs. "In the past, technology was the driver of new products," says An Yong Il, who runs Samsung's product research. "But now, design has taken over."
Global investors like what they see. Samsung's $48 billion market capitalization is bigger than such Japanese national champions as Hitachi, Fujitsu, and Toshiba. "We have achieved No. 1 status in a lot of flagship categories" including Internet-linked and voice-activated phones, LCDs, and high-end flash memory chips, says Kim, Samsung's marketing chief. He thinks that by 2005, the Samsung and Sony brands will be interchangeable in the minds of consumers.
Witness how the Koreans came out of nowhere to grab a market-leading 55% of the rapidly expanding global market for MP3 players, which let users play music downloaded from the Net or tunes copied from CDs. Digitalway, launched in 1998 by a group of former Samsung engineers, has managed to snag a 30% share of the U.S., Japanese, and Asian markets. Digitalway Chief Executive Woo Jung Ku thinks the Koreans have a big edge over China in the digital age because of their growing comfort with product and software design. Besides, Koreans' love of the Next Big Thing means rapid product turnover, consistent profits, and pumped-up innovation.
Finally, Korean consumers are infomaniacs, and they love to interact with Korean companies online. Digitalway receives about 100 e-mails a day from consumers with praise, complaints, and suggestions for new features for its array of lightweight and snazzy MP3 players. "We have a big and wide following of consumers on the Internet," says Woo, adding that the networking effects of a wired society are changing the game in consumer electronics.
Even pockets of old industrial Korea are being revived, thanks to foreign capital and managerial talent. Back in 1998, the Swedish industrial giant Volvo bought the money-losing construction-equipment arm of the Samsung Group in a $572 million deal. The Swedes fired 22% of the workforce, refinanced the debt, narrowed a lineup of 13 products down to one--excavators--and focused on profits, not market share.
Volvo also moved its entire global excavator operation out of pricey Sweden to lower-wage Korea. Last year, Volvo Construction Equipment Korea posted a $42.3 million profit on $415 million in sales. Some 70% of its revenues come from exports, vs. 30% under Samsung. Kim Hee Jang, a manager who survived the job cuts, says he is working harder than ever but finds the work environment far less formal and hierarchical. "I think I would feel as if I were suffocating if I went back to the old chaebol style," he says.
If such stories can be replicated on a major scale, Kim's strategic vision of turning Korea into a North Asian global hub and export platform for foreign multinationals could get interesting. One big edge is Korea's proximity to the fast-growing Chinese market. Another is the billions that the government and private sector have poured into wiring the nation with broadband fiber optics. The country's 25 million Internet surfers and 30 million mobile-phone users make it a unique market to try out new content services and wireless technologies. And Korea's manufacturing capacity and chip expertise add up to the "perfect environment" for Korea to emerge as an information-technology research and development center, says Ko Hyun Jin, Microsoft Korea's general manager. Already, Nokia (NOK ), Sun Microsystems (SUNW ), and Oracle (ORCL ) have major operations in South Korea.
Can Korea bury the past? Vestiges of the old Korea remain. Labor unions are still restive, and some chaebol operations are walking-dead companies--virtually worthless but still draining bank funds, especially government-guaranteed loans. There are thousands of small and midsize manufacturers that still aren't competitive by global standards. And the current influence-buying scandals involving two of Kim's three sons are a stark reminder of Seoul's gold-plated political corruption. Kim, who is in the final year of a five-year term, hasn't been implicated and has apologized. But he is feeling the heat. His approval rating is hovering around 20%, down from 80% four years ago.
If Koreans elect a new president who is indifferent to the need for more reform, there's a risk that this Korean miracle could yet stall. Still, veterans of many an Asian crisis think Korea has turned a corner. "Once you let the genie out of the bottle," says IMF resident representative Paul F. Gruenwald, "it's hard to put back in." The credit belongs to the Koreans themselves. After a huge social shock, they sucked it up, got back to work, embraced new technologies with relish, and started enjoying life again. First the pain, then the gain.
By Brian Bremner and Moon Ihlwan in Seoul