South Korea: Reform in the Balance

The key difference in the presidential race: What to do about the chaebol

Have the South Koreans had their fill of radical change? That seems to be the question as the nation's presidential campaign has suddenly come into sharp focus. On Nov. 25, Chung Mong Joon, who won plaudits for heading Korea's part of last summer's World Cup, dropped out of the three-man race. That means the election, scheduled for Dec. 19, will be a clear contest between conservatives and liberals--and, to some degree, a referendum on the chaebol, the politically powerful conglomerates that still form the core of Corporate Korea.

The remaining candidates are left-leaning Roh Moo Hyun, carrying the banner for the Millennium Democratic Party of current President Kim Dae Jung, and Lee Hoi Chang, the candidate of the conservative Grand National Party. Lee has made no secret of his plans to lift many of the restrictions on the chaebol, which have long been accused of using money politics to control Korea's economic agenda. In contrast, a hallmark of Kim's regime--and a bedrock principle of Roh's campaign--has been continued close policing of the sprawling companies. "We can't expect long-term economic development without reforming the chaebol and ending their abuses," Roh says.

With the departure of Chung--an heir to the Hyundai fortune who endorsed Roh--the candidates stepped up what was already a campaign of personal attacks. Roh calls Lee the "incarnation of the old order," while Lee has labeled Roh an "unpredictable radical" and "heir of the corrupt regime" of Kim.

Until Chung dropped out, Lee appeared to have the edge. But subsequent polls show Roh leading by as much as 9 points. Still, analysts call the race dead even. And recent elections don't auger well for Roh. In June balloting, voters handed 11 of 16 mayor's offices and governorships to the GNP. Two months later, the GNP won 11 of 13 National Assembly seats at stake in by-elections, winning control of parliament. Since then, seven Millennium Democrat legislators have defected to the GNP.

Whoever wins the balloting will govern a country whose vaunted economic recovery is starting to fray. Granted, economic growth is expected to come in at a relatively robust 5% next year, but that's down from 9.3% in 2000 and an estimated 6% this year. Corruption in both government and business still needs to be tamed. Unions are growing restive, demanding a bigger slice of the pie--which could spark disruptive strikes if they don't get it. And North Korea is a continuing thorn.

One thing Lee has on his side is impressive credentials as a corruption-buster. A judge for 30 years, he became the youngest-ever Supreme Court justice at age 46 and later served as anti-graft czar under President Kim Young Sam. That has allowed him to exploit public anger over the issue. Two of Kim Dae Jung's sons have been convicted of taking bribes--proof to the public that the current government is soft on graft. Lee has promised to set up a special committee to investigate senior officials accused of being on the take. "The most important reform is to cut the sleazy links between government and business," Lee declares. "We must build a society respecting the rule of law."

That's not to say Lee is invulnerable on corruption. His image has been marred by the disclosure that his two apparently healthy sons both avoided mandatory military service on the pretext of being underweight. And his GNP is filled with former senior bureaucrats and politicians who created the Korea that thrived on kickbacks from the chaebol. Indeed, even close aides acknowledge that Lee, a political novice who joined the party only six years ago, is too dependent on the political machine. "We know we will fail 100% if we rely on party officials for reform," says Yoo Seong Min, president of Youido Institute, a party think tank.

Roh, meanwhile, has been selling himself as a champion of the working class and a self-made man. The candidate, who never attended college, worked as a clerk at a fishnet company and in construction while he studied law on his own. After passing the bar exam in 1975, he represented dissidents and labor unions. Roh says that if labor strife threatens the economy, he will run negotiations himself to find a solution.

Lee has indicated he'll crack down on illegal strikes by civil servants and ban compensating workers for pay lost because of strikes. And he wants to expand performance-based pay--a relatively new concept in Korea. His goal is to create a "flexible and efficient" labor market. "We must create an environment where capital, technology, and labor can move in and out freely," he says.

With tensions on the peninsula running high after North Korea's admission that it still has a nuclear-weapons program, policies toward Pyongyang are a hot issue. Lee takes the tougher line. If elected, "I'll send a clear message that there won't be any substantive rapprochement or cooperation until the North gives up its nuclear program," he told a youthful crowd on Nov. 26. Roh, on the other hand, supports Kim Dae Jung's "sunshine policy," which has expanded economic aid to the North and encouraged investment there. At a recent campaign rally, Roh took a swipe at Washington's tough stance, saying: "The U.S. also needs to formulate a sunshine policy."

Roh has tried to keep the campaign focused on the chaebol, painting Lee as a step back to the days when politicians were in the pockets of conglomerates. Lee denies he would lead a period of retrenchment, saying he wants only to end state interference in business. "Restrictions on business must be cut to the minimum," Lee says. Roh argues that bans on cross-investment among chaebol affiliate companies have to stay and that conglomerates must be subject to borrowing ceilings.

One key to chaebol policy concerns Korea's big banks. Five were nationalized after 1997, and four remain in government hands. Seoul plans to unload them, but liberals such as Roh don't want them sold to the most likely bidders--the chaebol, which already have a partial lock on the financial system through their control of insurers and brokerages. While Lee agrees that chaebol shouldn't own banks, Roh would go further, restricting loans to the chaebol by their insurance and brokerage arms. Violators would be forced to spin off financial affiliates.

Democratic Korea has come a long way politically since its dark days of military dictatorship from 1961 to 1988, and economically since the 1997-98 financial crisis. But the country is facing plenty of new challenges that will stretch the abilities of whichever candidate wins the presidency. Given Korea's new prominence, the whole world has a stake in the outcome.

By Moon Ihlwan in Seoul

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