South Korea and the Chaebol System

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South Korea and the Chaebol System: Part One

History 01/11/2013 1 Comment

Today South Korea (or Republic of Korea, ROK for short) has a vibrant, diversified and highly dynamic economy but until very recently her economic system was dominated by a cartel of large conglomerates which had a disproportionate weight in economic policies and politics: these large conglomerates are called chaebol.
In Korean chaebol roughly means “clan owning property”. Some chaebol are household names throughout the world: Hyundai, Kumho, Hankook and Samsung. How did they come to become so incredibly powerful and why did so many of them fall without previous warning during the Asian Crisis of 1997, allowing Korea to become a freer, more diversified and stronger economy?

After the Japanese left the Korean peninsula, this was politically split in half, with the north entering the Soviet orbit (becoming the Democratic People’s Republic of Korea or DPRK) and the south entering the American orbit, becoming the ROK.
Between 1945 and 1948 ROK was governed by the US military (not unlike Japan) and during this period property previously belonging to the Japanese government, Japanese companies and Japanese individuals was confiscated and redistributed to Korean citizens and companies. The process was incredibly murky, with many allegations of irregularities but is sadly little documented outside of Korea to this day.

In 1948 the US military handed over power to the first elected president of ROK, the infamous Syngman Rhee. Rhee inherited a chaotic economic situation: the few industries expropriated from the Japanese were both starved for capitals and far between and the country was largely poor and agricultural. Rhee’s foremost ambition was unification of the Korean peninsula under his own rule. DPRK’s Kim Jong-Il harbored the same ambitions and tensions escalated into full-scale war in 1950. The ROK military, organized by the Americans as a militarized police and completely deprived of heavy armor, artillery and air support, was quickly routed by the well equipped DPRK army, necessitating a UN intervention. The war went on for three years, despite reaching an empasse in late 1951 already: the UN had the firepower and the better trained soldiers but the Soviet block was ready to take truly horrendous human casualties and had the advantage of internal communication lines. In 1953 the two sides agreed to the Panmunjom Ceasefire, which still holds to this day, no formal peace between ROK and DPRK having ever been officially signed.
In the aftermath of the war ROK was an impoverished country: infrastructures were in shambles, what little industry existed had been diverted to the war effort, hundreds of thousand had been killed and millions displaced. Rhee, however, had no clear plan of economic action. The US, still reeling from their costly mistake of not providing ROK with heavy weaponry, agreed to a hefty “aid package” which included weapons, foodstuff, fuel, industrial products and cash. Ironically most of these aids came from the newly reconstructed Japanese industry: during the Korean War the US had to grudginly allow Japan to quickly rebuild her economic strength to help fight the war. In short ROK quickly became heavily dependant on foreign aid which did little to improve overall economic conditions.
During the later years of the Rhee presidency, some of the families (or clans) which had obtained confiscated Japanese factories started to cultivate deep relationships with his administration: they received “special favors” in return for cash. In 1960, shortly after winning the election, Rhee was forced to resign due to a scandal and went into exile in the US.
An interim government was appointed, led by President Yun Bo-Seon and Prime Minister Chang Myon. Neither man was popular and to compel their difficulties the terrible state of the economy finally came into play as widespread riots and strikes started plaguing the country.
On May 16 1961 the military staged a successful and almost bloodless coup against the civilian government. After a few days of infighting, General Park Chung-Hee emerged as the leading figure among the golpistas. US President John Fitzgerald Kennedy immediately assured General Park of “total” US support and quickly recalled the US commander-in-chief in Korea, General Carter Magruder, who had urged ROK armed forces to “stay loyal” to President Yun Bo-Seon. Magruder never commanded anything larger than a desk again and was quickly sent into retirement.

General Park, a self proclaimed “staunch anti-Communist”, quickly announced to the nation his intentions of extirpating Rhee-era corruption and turn ROK into a modern, wealthy country. Japan, Korea’s neighbor and former master, was in those years experiencing a tumultuous economic revival and was obviously seen as an economic model of sorts by Park.
Initially the military junta jailed a number of prominent businessmen and factory owners on charges of being accomplices to the Rhee regime but charges were quietly dropped and the prisoners quickly released. Park had understood these men were the only allies he had in his ambitious plan of turning a backward, largely agricultural nation into an industrial powerhouse.
Working closely with the main industrial families, the Park government quickly came up with the following plan.
The private sector relinquished all financial activities to the State: all banks were nationalized. The various family-owned groups were reorganized along the lines of the old Japanese zaibatsu (and their modern day descendants, the keiretsu)*, becoming huge conglomerates with activities ranging from steel mills to breweries. In return for having relinquished all financial operations to the State, the families got in return precise guarantees they would get easy access to credit and their exports would be subsidized by keeping the won value pegged artifically low to the US dollar. Between 1962 and 1980 the won was officially deval‎ued four times relative to the dollar, losing over 400% of its initial value.
Korea had 30 large family owned conglomerates at the height of the Park regime: these became known as the chaebol. Their economic growth was tumultuous. This growth was not fueled by their particular efficiency, but by cheap credit at home (which was mostly provided by the State-owned banks on a no questions asked basis by inflating the currency and restricting credit to the rest of the society) and massively subsidized exports abroad. Aside from an artificially deval‎ued currency, the Park regime instituted crushing tariffs on many imported industrial goods and proved quite adept at negotiating excellent deals for the chaebol abroad. For example Park himself negotiated a peculiar deal with US President Lindon B. Johnson: in return for sending tens of thousand troops to Vietnam, ROK conglomerates got a monopoly on sundry supplies for Vietnamese troops and the US “pushed” for preferential tariffs on Korean goods in a number of South-East Asian States. Plus, additional funds were provided to the chaebol by foreign banks (for example to purchase capital goods and technology not available on the Korean market), with the ROK government guaranteeing the loans: the chaebol often had no interest in repaying the loans as the State-run banks would cover them in full and foreign banks weren’t wont on complaining or cutting credit lines as long as repayments were coming regardless of source.

While on paper it may seem like the chaebol system worked well to turn ROK into an economic powerhouse, it wasn’t bound to last. Already in the mid ’70s it started to show signs of deep strain. This long lasting crisis, whose effects are felt to this day, will be analyzed in the next installment

* the Japanese zaibatsu and keiretsu system will be covered in the near future. For the moment let’s just say this phrase, which is repeated everywhere from Internet sites to economic handbooks, has never convinced me. The Japanese conglomerates have two crucial differences with the chaebol. The first is that to this day at the heart of every keiretsu lays a huge, privately owned bank which acts as the main credit provider. The second is while all societies belonging to a chaebol are directly controlled by the owning family/clan, those belonging to a keiretsu are controlled in completely different fashion. But as I said the subject will be covered at a later date.

South Korea and the Chaebol System: Part Two

Uncategorized 01/15/2013 Leave a comment

For Part One: http://voluntaryistreader.wordpress.com/2013/01/11/south-korea-and-the-chaebol-system-part-one/

The ’70s marked a turning point in the chaebol system, and not for the better. The general worldwide slump which followed the abolition of the Bretton Woods Treaty (1971) and the First Oil Crisis (1973) had a very noticeable effect on Korean exports. However there were a number of other issues which rattled the chaebol system. As a first thing, the chaebol had traditionally been very dependent on low value-added goods like textiles, footwear, low-grade steel and simple chemicals. These goods were mostly exported to South-East Asian nations like Thailand, The Philippines and Indonesia. However as the ’70s progressed these nations, especially Thailand, started to be able not only manufacture the same goods locally, but also to export them, and at prices competitive with heavily subsidized Korean goods.

Worse still, the chaebol found a formidable foe in the Japanese keiretsu. Japan’s tumultuous growth bears little relationship with Korea’s. It wasn’t fed by cheap credit and an artificially deval‎ued currency but by massive capital accumulation and an almost staggering rate of investments. This meant the keiretsu were incredibly efficient on foreign markets, and not only in exporting cheap, low value-added goods. In 1968 Toyota started selling her first highly successful car in the US, the Corona MkII. The same year also saw the first Japanese cars (Daihatsu) arrive in Europe and Honda started selling her first large displacement motorcycle both at home and on export markets. The ’70s saw the Japanese keiretsu becoming prime movers at world level in high value-added goods: electronics, industrial machinery, complex chemicals etc. The situation became so desperate the chaebol implored the Park regime to help them become more competitive in the high value-added goods sector. This was achieved by the usual means: massive financing by the State-owned banks and further rounds of deval‎uation to make Korean goods (in the period generally seen as much lower quality than their Japanese counterparts) more palatable to foreign buyers. As one Korean economist said “It was a very painful process for the nation as a whole”. To provide more credit to the chaebol, the rest of the country was both denied credit and heavily taxed through massive inflation. This especially afflicted areas outside the industrial districts: standards of living in rural areas were very low and farmers’ productivity was still at ’50s levels, large scale mechanization having been made impossible by both lack of credit and low saving rates.

In the late ’70s General Park was becoming increasingly unpopular due to both this long economic crisis and his autocratic rule and in 1979 he was assassinated by a group of KCIA* officials. The assassins were quickly arrested by the army, brutally tortured and executed without trial. To this day it’s still hotly debated if Park’s assassination was part of a failed coup or personally motivated. Power passed on (after a brief civilian government) to another military strongman, Major General (later Lieutenant General) Chun Doo-Hwan, which ruled as a dictator from 1979 to 1980, and then as elected president from 1980 to 1988.

President Chun inherited a terrible situation. The economic disparity between rural areas and the industrialized districts (chiefly the Gyeonggi Province, centered on Seul) was staggering. Coupled with the repressive nature of the military regime this led to a number of rebellions which were put down with extreme brutality. It later transpired the ROK military, despite its hatred for the DPRK and China, had copied the “reeducation camp” system from its northern neighbors. However this was nothing compared to the worries about the State-run banking system. Bad loans had piled up for two decades, accelerating during the late ’70s, and, coupled with the need to finance the grandiose public works projects so dear to General Park and repaying the chaebol‘s foreign loans, had left the banking system very fragile. In 1983 a complete collapse was averted thanks to an emergency loan by Japan, whose terms are unknown to me. The Chun Administration hence started to enact drastic reforms to avoid the whole country falling down like a house of cards. As a first thing, slowly but steadily, the banking system was privatized. This was a very drawn-out process which took years to complete and whose effects are felt to this day, as Korean banks are not as efficient and competitive as one would imagine them to be. As a second thing the rate of money creation was drastically cut, allowing inflation to be kept under control. Finally, the State budget was frozen for a number of years.

There were two immediate effects for these reforms. The first is nominal GDP growth was savagely slashed: as it’s obvious, lower inflation meant nominal prices and asset values didn’t raise as rapidly as before, therefore exposing the “inflated” nature of ’60s and ’70s ROK economic growth. The second is standards of living throughout the country started to improve at a steady pace. A saner monetary policy led to a massive increase in saving rates and these savings became capital which was in turn used to increase productivity outside of the chaebol system. Privately-owned banks started to look for new customers and quickly found them in small businessmen and, even more critically, farmers. After being starved for credit for over two decades they desperately needed capital to improve their productivity and the new banking system, coupled with increasing saving rates, helped them to achieve the long-delayed mechanization of ROK agriculture.

Under Chun’s successors, Roh Tae-Woo and Kim Young-Sam, the process continued, accelerating under President Kim, the first Korean president with no military background.

And what of the chaebol themselves? In spite of all, they continued to prosper. Or at least they gave an impression of prosperity. Despite all the reforms, most of them continued the Park-era practice of taking massive loans without worrying too much about repayment. The banks may have become privatized but most of them had no problems lending huge sums to the chaebol, which were seen as a “sure bet”.

Between 1988 and 1989 a financial event which is still sending ripples to this day happened: the ’80s Japanese “Bubble Economy” burst. We’ll deal with this event in the future but for now suffice to say to prevent a complete meltdown of some of the largest keiretsu banks the Bank of Japan lowered rates to near zero “in perpetuity”, flooding these financial institutions with dirt cheap credit. This credit quickly found its way to Mainland Asia, especially in countries like India, Thailand, Malaysia and ROK. This credit bubble took two forms: the first is the so-called yen carry trade, by which banks borrowed money at near-zero rates in Japan and lent it at much higher rates in countries like India. The second were direct loans from Japanese banks to foreign customers, especially in Thailand, Taiwan and ROK.
This credit bubble fueled the so called Asian Tiger Economy, a period of tumultuous growth in the Pacific Rim (and India) which turned out to be a catastrophic and costly mistake.

On July 2nd 1997, Thailand’s Central Bank was forced to float the baht after “discovering” they had no foreign currency reserves left to protect the baht from a massive speculative attack. This move triggered a cascade of events which resulted in what was called the “perfect financial storm” although it looks like small fries compared to the present US and European financial crisis.

The causes of this colossal crisis were chiefly two. First, most Pacific Rim (chiefly ROK and Thailand) countries had fixed or semi-fixed exchange rates which, coupled with large current-account deficits, left their currencies open to massive speculative attacks. Second, the connection between very low interest rates in Japan and moderate to high interest rates in Pacific Rim countries led companies to borrow heavily abroad to fund very aggressive and very poorly supervised investments at home. As Jeffrey Sachs wrote about Pacific Rim financial institutions before the bubble burst “Banks borrow abroad and lend at home with reckless abandon”.

This crisis hit the chaebol system like the proverbial sledgehammer. Many of them had taken large unhedged foreign-currency loans and, with the won in a precipitous fall against foreign currencies, they faced impossibly high debt repayments in domestic currency terms. As the crisis unraveled, it was also discovered many chaebol, far from being the solid companies they pretended to be, had piled huge mountains of debts they had been able to hide from the outside world thanks to highly irregular accounting practices on which the ROK government had turned more than a blind eye for years. Out of the 30 chaebol, 11 were literally swept away by the Asian Crisis. Others were forced to sell valuable assets at rock bottom prices to avert a complete meltdown. The chief casualty was the Daewoo chaebol, the country’s second largest, which was completely defunct by 1999: some of its operations were closed down, others sold off to partially repay creditors and a few (notably the profitable shipbuilding division) were spun off and became independent groups. Even Hyundai, the largest chaebol by far, was forced to sell off core operations to remain solvent, even if barely so. Two chaebol emerged stronger from the crisis: Samsung and LG. Both had far better accounting and financial practices than their competitors and were also able to expand by buying patents, factories, machinery and whole operations at bargain prices.

However the clear winner of the crisis was ROK as a whole. In the aftermath of the crisis even the government understood the foolishness of over-reliance on the chaebol system and the weakness of a pegged currency. Although the Korean economy had started to see an expansion of small and the middle sized businesses in the’80s already, the true boom came after 1998. Today ROK has a much diversified economy, which has curbed reliance on traditional heavy industry and low value-added goods significantly. Middle and small-sized enterprises manufacturing capital-intensive goods, either born from the ashes of the defunct chaebol or newly founded, are now the backbone of the economy. Standards of living have soared and now ROK citizens are among the wealthiest in the world.

Not all that’s glitters is gold though: in the closing months of 2012 a series of major scandals hit a number of ROK banks, hinting at the existence of widespread corrupt lending and accounting practices. Times have changed though and, following public outcry, the ROK government was forced to take legal action against the responsible (or at least some of them) and will apparently allow the worst banks to fail. It may not be a perfect world, but at least ROK appears to have learned from her past mistakes. Confront with the US and Europe were failed banks are artificially propped up and, instead of being tried, bankers are still able to dictate monetary policies.

Perhaps we need an Asian Crisis of our own to learn as well…

* Korean Central Intelligence Agency. This was the Park-era secret police, intelligence and counter-intelligence agencies all rolled in one. It wielded tremendous powers and was responsible for terrible abuses. Following General Park’s assassination it was deeply reformed and renamed Agency for National Security Planning.

Bibliography:

Haggard, Stephen (editor), Economic Crisis and Corporate Restructuring in Korea: Reforming the Chaebol, 2003, Cambridge (UK), Cambridge University Press

Sung-Hui, Chwa, Sung-Hee, Jwa, The Evolution of Large Corporations in Korea, 2002, Cheltenham, Edgar Elgar Publishing

Ten Years On: How Asia Shrugged off its Economic Crisis, The Economist, July 4th 2007

http://voluntaryistreader.wordpress.com/2013/01/15/south-korea-and-the-chaebol-system-part-two/

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• Park Geun Hye agenda challenging chaebols in South Korea

South Korea, the one-time agrarian backwater, has emerged as an icon of manufacturing, technology — and cool.

By Yoolim Lee

Bloomberg News

With North Korea escalating its threats to test a ballistic missile, South Korean President Park Geun Hye was conferring with Bill Gates on another pressing matter.

Seated across from the Microsoft co-founder on April 22 at a formal dining table in the Blue House, her official residence, Park picked the tech mogul’s brain about how to nurture entrepreneurs to keep the world’s 15th-largest economy humming.

“If there are more people like you, we will be able to create the world we dream of,” Park told the smiling Gates.

By most measures, South Korea has already implanted itself among the globe’s economic success stories. The one-time agrarian backwater has emerged as an icon of manufacturing, technology — and cool.

Fifty million people have defied geography and history, rebounding from a 35-year Japanese occupation and the Korean War to create a thriving capitalist democracy along the world’s most heavily fortified border. South Koreans in 1970 earned an average of $254 a year — less than the $435 earned by their North Korean brethren. Last year, they averaged $22,708.

Family-controlled conglomerates known as chaebols, cranking out memory chips, liquid-crystal-display screens and tablet computers, have made Korea the seventh-largest exporting nation. Samsung sells more smartphones than Apple, while Hyundai, once known for unreliable cars, is aiming at BMW in luxury vehicles. Sales of the top 30 chaebols equaled 82 percent of South Korea’s $1.12 trillion gross domestic product in 2012, up from 53 percent in 2002.

Seoul, the work-obsessed capital of 10.4 million, is the epicenter of the buzz. Workers whose parents once toiled in uniforms making wigs and toys flock to office towers sporting Chanel and earbuds, traveling there in subways equipped with free Wi-Fi.

The world’s most-wired country runs on “pali, pali” or “quickly, quickly,” as people in cafes along Garosu-gil Street swap quips or compete in a one-minute game called Anipang on ubiquitous mobile phones. K-pop hits, soap operas and “Gangnam Style,” rap artist Psy’s record-setting video spoof of over-the- top consumption, spread the vibe worldwide.

“Korea is going through a renaissance,” says Richard Min, a Korean American who moved to Seoul from Boston in 2000 and co-founded technology incubator Seoul Space. “It’s cool to be Korean.”

Park, the Republic of Korea’s 11th president and its first female leader, is striving for more than coolness. The daughter of late President Park Chung Hee, the military strongman who championed the country’s industrial chaebols, says to sustain growth, South Korea must move beyond those conglomerates and encourage small businesses.

“The past economic model designed to catch up with advanced economies drove Korea’s rapid growth, but it has lost steam,” Park said in a written reply to questions.

She aims to add 2.5 million jobs during her five years in office — 410,000 of them in areas overseen by the Ministry of Science, ICT and Future Planning. (ICT stands for Information and Communications Technology.) She plans tax incentives for entrepreneurs and venture capitalists and an alternative stock market to help companies raise money.

“The president’s drive to create new jobs started from a humble realization that we need to do something radically new,” says Cho Won Dong, the president’s senior secretary for economic affairs.

Creative economy

Dual forces lend urgency to Park’s mission: Korea’s aging population and falling birthrate and the economic dynamics of its neighbors.

While much of the world assumes that the South’s most vexing challenge is North Korea’s volatile new leader Kim Jong Un, South Koreans themselves worry more about finding good jobs and staying economically competitive with the real giant to the north — China, the No. 2 global economy. They are also looking anxiously at Japan, the country that China eclipsed, as Prime Minister Shinzo Abe drives down the yen.

Women, who are paid 39 percent less than men for the same job, are hoping Park will narrow an income gap that was the highest among 34 Organization for Economic Cooperation and Development members.

Park says the ticket to expansion is a creative economy underpinned by entrepreneurs and venture capitalists.

“Growth led by a few big firms and the government is bound to be limited,” she told policymakers in April.

While Park is only now unrolling the details, investors like what they have seen so far.

“President Park’s goals are very good and, if achieved, will take Korea to the next stage,” says Mark Mobius, executive chairman of Templeton Emerging Markets Group, who oversees more than $50 billion in emerging-markets equities, about 4 percent of them Korean stocks.

Park has her work cut out for her. The boom that has allowed people to splurge on luxuries is ebbing. One immediate challenge is a slowdown in China, which has become the largest buyer of South Korean exports. Longer term, China, with a research and development workforce of 2.3 million — seven times greater than South Korea’s — looms as a formidable competitor.

“China has no fear of Korea anymore, so we now have to come up with something different,” says senior economic secretary Cho. “President Park Geun Hye’s solution is a creative economy.”

In Park’s view, the South Korea that arose as an industrial giant under her father has the potential to become the next Silicon Valley.

“One person can change the world, like Bill Gates and Steve Jobs,” she told top officials at the Blue House on April 18.

So says the general’s daughter, the latest leader of a country that has survived war and privation and developed a decades-long habit of outsmarting its neighbors and confounding expectations.

South Korea’s economy expanded by 2 percent last year, the slowest pace since the 0.3 percent rate in 2009. The central bank has twice this year cut 2013 projections, with the estimate of 2.6 percent on April 11 a downgrade from its initial forecast of 3.2 percent.

Aging Koreans

Park is mindful of her country’s demographic time bomb. The population is aging at the fastest pace of any advanced nation, according to the Organization for Economic Cooperation and Development. The available workforce will dwindle starting in 2017. By 2026, one of five Koreans will be 65 or older, a level the U.S. won’t reach until a decade later, Statistics Korea says.

Already, the middle class is shrinking and people are falling back into poverty as the division between rich and poor widens. The top 20 percent of South Koreans earn more than five times as much as the bottom 20 percent.

Park aims to have 70 percent of South Koreans in the middle class, with incomes that range today from $18,500 to $55,500, by term’s end. She wants more Koreans to work, too. Her goal is to employ 70 percent of people ages 15 to 64, up from 64.2 percent in 2012.

“The new administration seeks to establish an economic system characterized by a virtuous cycle of growth, employment and distribution,” Park said.

Happiness fund

The president administered an economic booster shot in April. She unveiled a 17.3 trillion won supplementary budget, the largest of its kind since the Asian financial crisis. She created the so-called National Happiness Fund to help low-income earners consolidate or refinance household debt, which totaled 959 trillion won, equal to 136 percent of disposable income at the end of 2012.

Park took her campaign for a creative economy to the United States in May. Stopping in New York, she extolled the late Korean video artist Nam June Paik.

“The U.S. invented the video,” Park told supporters at the Waldorf-Astoria Hotel. “Japan provided it to households. Korea made it art.”

At a White House meeting, Park and President Obama pledged to form a united front against North Korea’s threats. She told the U.S. Congress she would “write a sequel” to Korea’s transformation story.

Accompanied by a 51-member economic delegation that included Samsung Chairman Lee Kun Hee and Hyundai Chairman Chung Mong Koo, Park met U.S. business leaders May 8. In Los Angeles, she brainstormed with Jennifer Yuh Nelson, the Korean-American director of “Kung Fu Panda 2;” venture capitalists; and executives. She took advice from a participant to invest in a yet-to-be-determined U.S. venture capital fund, which would in turn invest in Korean startups.

“Hopefully, we can create another Apple or Google on Korean soil,” says economic adviser Cho, who accompanied the president to the U.S.

Dominant chaebols

Park’s entrepreneurship drive will be difficult in a country still dominated by conglomerates, says Bruce Cumings, a history professor at the University of Chicago.

Led by the chaebols, Korea’s economy has expanded every year in the past five decades except for two: 1980, during the oil shock, and 1998, amid Asia’s financial crisis. Outbound shipments by the 30 largest companies accounted for 84 percent of South Korea’s exports in 2010.

“Corporate bigness has been a key to Korean success, and the most successful chaebol, Samsung, now rivals Apple,” says Cumings, who has written nine books on Korea, including “The Korean War” (Random House, 2011). “Samsung’s prowess is not exactly an argument for small-bore entrepreneurship.”

Choi Seok Won, head of the research center of Hanwha Investment & Securities in Seoul, counters that many chaebol jobs don’t benefit Koreans. The overseas production of Korea’s large manufacturers jumped to 16.7 percent of their total output in 2010 from 6.7 percent in 2005. Hyundai builds cars abroad, and Samsung plans a Palo Alto, Calif., campus complete with startup incubator.

“Chaebols are phenomenally successful, but they no longer create jobs at home,” Choi says.

Chaebols also have acquired a reputation for bending the rules, says Shaun Cochran, head of Korea research at Hong Kong-based brokerage CLSA Asia Pacific.

“People in Korea don’t trust the power structure at the top because of a long history of leaders with special exemptions,” he says.

From 1990 to 2012, the heads of seven of the 10 biggest chaebols have been sentenced to prison for bribery, embezzlement and tax evasion. None spent more than a few months behind bars.

“If Park Chung Hee’s legacy was nurturing the chaebols, it is his daughter’s chance to come full circle,” Cochran says. “She has to turn her back to close relationships her father had. She has to stand up and say those days are over.”

Entrepreneurial programs

For companies three years old or younger, she’s expanding tax breaks for angel investors and establishing a government-run Future Creation Fund, which, along with private contributions, will hold 200 billion won of seed money. She plans tax incentives to sellers or buyers of companies that are four to nine years old and a similar 300 billion won fund.

For firms 10 to 15 years old, Park is proposing a stock market called the Korea New Exchange, or Konex, for capital raising. It would supplement the Kosdaq, Korea’s version of the tech-heavy Nasdaq.

“As a government, we cannot create creativity but an environment where startups can thrive,” says Choi Mun Kee, the new science and ICT minister.

Choi, as president of the Electronics and Telecommunications Research Institute, laid the foundation for Korea’s mobile phone industry.

“Entrepreneurs are going to be encouraged to take risks, allowed to fail and get another chance, raise capital easily and exit through mergers and acquisitions.”

The price of failure is high in South Korea. A business owner has little chance of rebounding from bankruptcy. Korea’s small and midsize companies raised 99 percent of their combined 472 trillion won of capital through loans last year, the government says.

“If you start a business and fail, that failure sticker will be with you for the rest of your life,” says Daniel Shin, founder of TicketMonster, South Korea’s biggest shopping-deal website. He says Koreans define success as being a doctor or a lawyer, not an entrepreneur.

Choi wants to fight that perception by celebrating such startups as KakaoTalk, a free messaging service for smartphones with 88 million worldwide users. Seated in his office among framed commemorative stamps of Psy, Choi also praises Golfzon, creator of a virtual golf game, and Delight, which developed a hearing aid using a 3-D printer.

The government, with its history of intervening in the economy, has a good chance of sparking a Korea-style Silicon Valley, says Cochran, of the brokerage firm CLSA.

“Korea is one environment that is able to bring together a large number of industries,” he says. “The government will get behind it, the banks will get behind it, and the companies will get behind it.”

http://seattletimes.com/html/businesstechnology/2021423181_southkoreaentrepreneursxml.html

Chaebol failures spark rise in bad loans - FT.com

A string of bankruptcies in South Korea has prompted concerns that the country, already saddled with high levels of household debt, now faces the added challenge of dealing with a similar problem within its companies.