Category Archives: Sources

Opening up – doing business in North Korea

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By Andrew Wood, Financial Times
Published: Jan 21, 2008
http://search.ft.com/ftArticle?ct=0&id=080121000025

North Korea presents a big challenge for fund managers: how to invest in the world’s longest surviving Communist state? To many people, it is a bellicose, isolated Stalinist basket case. To a handful of investors, it is one of the purest, and perhaps most challenging, frontier markets on the planet.

There is, of course, no stock market, and the country issues no sovereign bonds after reneging on its debt more than 25 years ago. Even people who successfully did business with the Eastern Bloc in the years before and during glasnost and perestroika seem daunted.

Even the Communist party in North Korea’s traditional best friend, China, has abandoned socialist state-ownership and economic control. But North Korea has extended Marxism into a philosophy of juche or self-sufficiency, under its ‘Dear Leader’ Kim Jong-il that has spurned contact with foreigners.

Millions of people have died in the past two decades because of famine, and western observers often suggest North Korea’s economy is close to collapse. The CIA estimates that annual economic output is just $1,800 (£918, €1,227)per person, compared with $24,500 in neighbouring South Korea, which followed a very different economic path after the Korean War of the 1950s that divided the peninsula. The country is further isolated by its reputation for counterfeiting currency, smuggling drugs and building missiles and nuclear devices.

“North Korea is still on the scope of many anti-terrorism watch-lists and it’s not possible to trade with it as though it were a normal country,” says Hank Morris, director of corporate financial advisory services at the consultants IRC in Seoul, the capital of South Korea.

“US citizens are forbidden to trade with North Korea in all but a handful of things, such as magnesite. Given the complexity of the situation, virtually all the trade is with China and Russia, as they share common borders with North Korea.”

However, a few western funds are either investing or preparing to invest in North Korea.

The Chosun Development & Investment Fund, based in London, started subscriptions after receiving approval from the UK regulators in 2006. (Chosun is one of the Korean names for the country.) It is looking to raise at least $50m (£25m, €34m) to invest in North Korea and help the country “develop its legitimate economic activities along internationally accepted lines and also provide an attractive return to investors”.

The fund’s team includes Lynn Turk, who formerly co-ordinated North Korean matters for the US State Department. He also led the first US diplomatic delegation to Pyongyang in 1994.

Another London-based manager that specialises in emerging markets, Fabien Pictet & Partners, is planning a fund to invest in joint ventures in North Korea. Its Three Kingdoms Korea hedge fund already has some investments in South Korean companies that do business with the North – although that is not the main focus of the fund. Progress is slow. “I think we won’t have much to say about the fund until we are clear on the denuclearisation issue,” says Richard Yarlott, Fabien Pictet’s chief executive officer for Asia, last week.

He would not comment on which business sectors the fund might focus on. But other investors in North Korea say there are plenty of opportunities, but it is best to think small.

“You are talking about projects that would be around a million or even a few hundred thousand dollars to make work,” says Ken Frost, finance director of Phoenix Commercial Ventures, which runs several joint ventures in North Korea.

“If you want to rebuild the electricity grid, then that’s going to take billions. But if you want to reanimate a coal mine that could be a few million dollars to pump out the water and install ventilation.

“You would be an idiot not to have people on the ground here. You can’t manage by e-mail.”

Phoenix has stakes in several companies in the Pyongyang area. One sells such essentials as soap powder and personal computers. Another develops software using Linux (US trade restrictions mean that proprietary software and operating systems like Windows cannot be sold to North Korea). Another company makes artificial flowers for export.

Mr Frost says he has been contacted by several foreign investment funds looking for joint ventures. The Phoenix website lists many North Korean endeavours looking for partners. Investing in countries such as North Korea may raise moral questions – the country has a poor human rights record and direct investment may sustain a member of what President George W. Bush memorably vilified as the “Axis of Evil”.

But for investors who share Mr Bush’s sentiments, there is always the Roosevelt Anti-Terror Multi-Cap fund. This open-ended fund, based in New York, will not invest in any companies that do business with “countries that sponsor terrorism”, including North Korea.

Seoul Train

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194311947A Korean pop mogul with a thing for Berry Gordy has invaded New York, and he’s brought a stable of potential stars with him
by Chloé A. Hilliard
July 17th, 2007 5:36 PM
http://www.villagevoice.com/nyclife/0729,hilliard,77247,15.html/full

The engineer behind Asia’s biggest pop star ever has his eyes set on a new frontier.

Six months ago, Jin Young Park and his company, JYP Entertainment, branched out from South Korea, purchasing a $4 million townhouse on East 31st Street. Park transformed the place into a dorm and recording studio for his next set of young musical trainees, with a party space below. The building officially opened for business last month with a bash for music-industry insiders, Korean community leaders, and the cameramen who follow Park’s every move.

Some of Park’s neighbours have mistaken the house for a club with its velvet rope, security guards and the fluorescent “JYP” affixed to the building’s exterior. Instead, it’s the city’s first Asian-style pop-music factory, a manufacturing plant for the mostly interchangeable, slick young crooners who have become huge money-makers on the western shores of the Pacific Rim: South Korea, Japan, and China.

Park, meanwhile, has emerged as Asia’s answer to Colonel Tom Parker or Lou Pearlman. His Elvis is Rain, a 25-year-old Korean pop singer (born Ji Hoon Jung) whose popularity in Asia is actually pretty astounding. Rain had $20 million in sales last year and has sold more than three million albums in his career. In a recent worldwide online Time magazine poll, Rain was voted the Most Influential Person of 2007. His world tour last year featured his first performances in America and quickly sold out Madison Square Garden. He might be even more popular here if he spoke some English. But earlier this month, Rain opted to leave JYP after his five-year contract expired, and now Park is looking for a new cash cow.

At last month’s launch party, Park hosted a packed house to welcome himself and his current crop of eight young performers to America. Dubbed “Gateway to Asia,” the party was a collision of two worlds—Korean businessmen and their wives in suits and cocktail dresses, mingling with fashionable hip-hoppers who had showed up to check out the house and sip some free Henny. Many had never heard of Rain and didn’t seem as impressed by the traditional Korean drumming and the debut performances of two of Park’s trainees as they were with the open bar, free massages, and Korean fortune-telling.

No fewer than six cameras were in Park’s face all evening long. His launch is big news back home.

His townhouse is less flashy than some producers’ homes, but he’s put some thought into the décor. The parlour level he calls the “Ice Floor” for its stark white walls with bamboo stalks and cloud-like white leather ottomans. A dozen round glass bowls with one goldfish swimming in each fill up the cube shelving.

“Are you guys having a good time?” Park, 35, asked the crowd as he ascended the parlour floor’s stage, spotlights hitting him from the balcony. The look was calculated playboy: top three buttons of the crisp white shirt undone under a suit jacket. Three-hour-a-day gym muscles on display. Zoolander mane.

Over the past decade, Park has graduated from backup dancer to pop star in his own right to a media mogul whose company is estimated to be worth more than $60 million. His star factory works on a scale that a producer like Simon Fuller could only dream about: He recruits talented Asians as young as 11, trains them for years at one of his “academies,” crafting an image for each one, then puts them on a conveyor belt of marketing, recording, and filling roles in television shows and movies.

And his track record has people on this side of the Pacific paying attention. “JY is on everyone’s radar,” says Karen Kwak, an executive vice president at Island Def Jam Music. “He has a drive that’s like no other. He is going to break into the America market—with that kind of commitment and focus, I can’t see how he can’t.”

At the coming-out party, Park passed the microphone over to one of his young protégés, who goes by the name G-Soul and was rocking a faux-hawk, designer jeans, and graphic shirt. He’s been training under Park for seven years.

G-Soul belted out the gospel song from Sister Act 2 in a cappella style, his sound a mix of today’s young black male singers—Neyo, Chris Brown, Mario—but with more depth. Then another trainee, a young woman named J Lim, took the stage wearing a silver sequined dress. She sang a soulful rendition of John Lennon’s “Imagine” with ad libs reminiscent of Alicia Keys. “Uh, yeah—put yo hands in the air. . . ” she crooned, and the crowd appeared wowed. It’s a sound some obviously didn’t expect to hear coming from an Asian mouth.

“If you think this is impressive, we have 100 more kids training over in Korea,” Park told the crowd.

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J Lim, G-Soul, and another young singer named Min sit next to Park, nervously grinning before their first American interview. Min speaks the best English, which is one of the reasons why her album is dropping first, but in front of Park her responses are reduced to three-word answers. She’s shy and she giggles, as though her comprehension of English has suddenly vanished.

G-Soul, Min, and J Lim, with JYP

G-Soul, Min, and J Lim, with JYP

“I like Mary J. Blige, Aretha Franklin, and Beyoncé,” she manages to say. She’s wearing a black mini-dress and four-inch platform pumps. All three artists agree that working with Park has its pluses and minuses. “Sometimes I look at him like a brother,” says G-Soul, 18. “Other times, he’s real strict.”

When G-Soul admits that he thinks some of American hip-hop music is “stupid,” Park pats him on the thigh, a subtle warning that his choice of words is incorrect. G-Soul looks down at his hands. “I tell my kids that after your third album with me, I’ll respect your opinion,” Park says. “Until then, you do what I say.”

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A classically trained pianist since age four, Park majored in political science at Yousei University, one of South Korea’s top three universities. After working as a backup singer for another top Korean artist in the early 1990s, Park went solo with a debut album, Blue City, in 1994.

He claims that many of his lyrics were “banned” for sexual content—but today, he says, the Korean government considers him a top export and representative of the “Korean Wave.” His artists, meanwhile, have put out 23 albums, 18 of which have gone to No. 1 in Asia.

Park says that 90 percent of JYP’s music sales are digital downloads. He refers to CDs as “souvenirs.” To insure a larger distribution of digital music, in 2002 Park sold half of his company to SK Telecom, Korea’s top mobile-communications company. The deal means that all of JYP’s music is made available on the largest digital platform in Korea, including its music site Melon.com, which according to Park is light-years ahead of iTunes. Park estimates that sales at his company are increasing by 20 percent each year.

But he misses his own performing days: After he’s done building his American empire, he says he’ll return to the studio and then finish his career touring.

Park prides himself on only sleeping five hours a night, but he looked exhausted as he sat in the studio late one night, feverishly fine-tuning a demo for J Lim. He was flying to Chicago the next day to play J Lim and G-Soul’s music for R. Kelly, the r&b king currently under indictment for soliciting a minor for child pornography, who Park says has taken an interest in working with his young artists.

This isn’t Park’s first foray into the American music scene. Park moved to Los Angeles three years ago with samples of his work; he wanted to see if he could sell his music and produce songs for American artists. In less than a year, he’d sold songs to Will Smith, r&b songstress Cassie, and rapper MA$E. “All the songs I did placed on albums. I was the first Asian to sell music to top artists,” he boasts, but it’s difficult to confirm his claim. “This made me and my board members comfortable to make the move to America.”

He knows that part of his challenge is getting Americans to be more receptive to the outside world. “American people think that this is the world,” he says. “In baseball, you call it the World Series. That’s weird to us. In the movie Mars Attacks, they go to the White House to surrender.” He shakes his head in bewilderment at the American ego. “If America really opened its eyes to the world, it would help them to be a true leader.”

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To find the young and talented, Park holds open auditions each year in cities like Hong Kong and Singapore. Each audition brings out between 1,000 and 5,000 kids, who are quickly whittled down to only 10 to 12. The chosen few are then moved from their homes to a JYP training facility where, for the next six months to several years, they constantly train, working on their singing, dancing, and acting—and also learning a second language of Park’s choice. Only one in 10 make it through the training process. It’s something like American Idol, but extended over several years, and Park is the only judge.

For the first round of his U.S. gambit, Park has placed his bets on a cherubic 16-year-old named Min. The pop and r&b singer has been training with him for four years, the last three in Los Angeles and New York.

“I’ve spent over $500,000 on Min,” Park tells the Voice. Confident that South Korean techniques are about five years ahead of the American music industry, Park has looked for local partners to bring along. For Min’s first album, Park has teamed up with the King of Crunk, Lil Jon.

“It’s kind of like Fame, but it’s on a different level,” says Lil Jon, who plans to release Min’s album in the late fall. “That’s a lot of patience and a lot of vision. You have to see that talent way in advance. . . . When we first got in the studio together, [Park] came with all of his stuff together; there was no half-ass-ness at all. He’s a stand-up guy.”

Park knows that the gradual preparation of artists is something American labels no longer have patience for. One example he offers is the fate of the rapper Mims, who had a huge success with the single “This Is Why I’m Hot.”

“His song was No. 1; the album came out and flopped. American record labels are still looking for that one song.” To fight off the one-hit-wonder phenomenon, Park has refined what he calls “one source, multi-use.” All of his artists have more to offer than music: They craft personalities, hone their acting and dancing skills, and develop fan bases that remain loyal for years.

“I hope American record labels go back to doing things this way,” says Park. “I hope my being here can contribute to that. I don’t think they should learn from me; they should learn from Motown. That’s who I learned from.”

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Taking a break from his late night of mixing, Park explains his approach to music. “Michael Jackson is a bible to us,” he says. “I train them solely on American samples. I don’t want my artists to look fake. I want them to look real, not like just another African-American wannabe.” Park encourages his students to study African-American culture and takes them to see black singers in concert and films like Dreamgirls and Stomp the Yard. This can lead to some cultural misunderstandings, as when a black reporter from the Voice put out her hand to say hello to G-Soul and got a “pound”—an urban handshake that ends with a snap of the fingers. Someone, apparently, had been watching too much BET.

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On a recent afternoon, Mary J. Blige was blaring from a small boom box, and Min was giving it all she had. Her long brown hair whipped through the air as her oversized, sweat-drenched shirt and sweatpants clung to her five-foot-one-inch frame. Her every move was being videotaped by a JYP staffer for her development archives. Periodically, Park will look over the tapes to see if Min is improving, note where she needs work, and give suggestions to the choreographer. She has recently completed her freshman year at the Repertory Company High School for Theatre Arts, a small Manhattan school of 180 students. With high school out for the summer, her days are composed of dance, vocal lessons, English and Chinese classes, and trips to the gym.

When the music stopped, Min walked over to watch the video of her footwork. Two JYP staffers watched alongside her.

“She’s a little sloppy,” one staffer said.

“Well, this is only her second class since she’s been back,” the choreographer responded, jumping to her defence. They carried on talking about her as if she wasn’t in the room. The criticism doesn’t faze her. This is what the last four years of her life have been about. Park believes in natural talent, but he doesn’t believe in putting someone before the public until they’ve been tested, trained, and educated. (The same philosophy applies to his executives—the CEO who replaced Park in Korea first shadowed him for two years.)

After six months, a trainee is evaluated by Park, and either dropped or allowed to continue—those who make it are divided into two tracks: one track focusing on dancing, acting, and modelling, the other on learning an instrument and composition. Min is in the first category.

Park says the focus is necessary to produce a well-rounded star. “I don’t want my artist to get onstage and look a mess,” he says. When he signed Rain in 1999, for the first year Park required him to read the newspaper every day and write a report on it. Rain wouldn’t release an album for another three years. “I’m testing character and dignity,” Park says. “In 11 years, not one of my artists has gotten in trouble. I don’t want an asshole on my label. Nobody smokes—not even a cigarette. I want to be happy with a good kid. All of my artists have longevity. If you want to be a star, pay the price.”

Koreans, meanwhile, track the number of years an artist has spent training with Park like sports fans talking about a professional athlete’s stats. Park, in turn, credits the devotion of his trainees to the general mind-set of Koreans.

“South Korea is the 12th-wealthiest country in the world,” Park boasts. “We have no natural resources; we’re half the size of Florida and only have 50 million people—one-fifth the total of America’s population. We’re the home of Samsung, Hyundai, LG, and Helio. Ten-hour days are standard for us, because we know if we don’t work, our country won’t succeed.” For the last 15 years, Park has committed himself to working 16-hour days, breaking them down to know exactly how much time he spends per day eating (two hours total), working out (three to stay ready for his comeback), and showering and grooming (one and a half).

Min, however, isn’t quite so regimented. She’s showing some rustiness because she’s just returned from spending two months visiting her parents in South Korea. It was the first time she had seen them since leaving to train with Park three years ago.

JYP regularly sends parents videos of their children performing. On YouTube, there’s a video of Min at age 13, singing a Beyoncé song. There’s another of her dancing in the studio, and more of her training as Park looks on and corrects her.

“My trip was OK. It wasn’t great,” Min explains outside of earshot of the JYP staffers. “I’m so different now. I didn’t think I would have to be away from them for so long. I left home at 11. I thought I would see them after six months.”

Most of Park’s trainees are plucked from poor families, and they worry about supporting their parents back home. Park knows he can count on that worry to motivate them.

“Here, being poor gives you street credibility,” he says. “In Korea, it means nothing. [But] I have found that it’s the poor ones that work hard and really want it.”

Min’s parents aren’t compensated for their daughter’s time in training. They pay nothing, however, for their child’s housing, schooling, and artistic lessons. All of that Park recoups when he puts out an album.

“I get a monthly allowance of five dollars,” Min says when asked if she is paid anything now. “I mean, $500,” she corrects herself, laughing. “I lost my English a little since I got back.”

All this talk of rigorous training and kids not seeing their parents for years is starting to sound weird, even downright cultish—and the JYP staffers seem to know it. They start crafting responses that play down the training process and make it all sound less odd. But the harder they try, the weirder it sounds.

“We’re more like a family structure,” says the vice president of operations, Jay Kim. “Our company has a lot of credibility, and parents know we are trustworthy. From the parent’s standpoint, their child is getting a better education and opportunity being here with us.” A special department manages the company’s relationships with parents. Park thought about living with the kids, but instead got his own penthouse on 42nd Street.

He’s living in Trump Tower until that renovation is finished.

Lost in Transit

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FT Magazine coverBy Anna Fifield
http://www.ft.com/cms/s/2/04c2a02e-13f1-11dc-88cb-000b5df10621.html
Published: June 8 2007 17:20 | Last updated: June 8 2007 17:20

When he stepped off a flight into the glittering, almost science-fiction-like airport terminal near Seoul three years ago, Park Hyun-ki didn’t find South Korea all that different from the North. First, intelligence officers took him away for questioning, an experience not unusual in the North. And once he passed through detention, the fast pace of life in the capitalist South and the “pretty” accent of Southerners felt familiar thanks to the hours of South Korean soap operas he had watched while hiding in China. “It didn’t feel very foreign,” the 28-year-old says. “I did think all the demonstrations on the streets were a bit strange. You can’t even imagine staging protests in North Korea.”

To North Koreans, the South is at once familiar and alien. People who share their names, their language and their history drive down neon-emblazoned streets in Hyundai SUVs, watch television on their mobile phones and criticise the president at every opportunity. Park’s hometown of 3,000 people, lying just outside Musan, a mining city in the North Hamgyong province of North Korea, near the border with China, is a world away from this. The bleak, rocky province – once the centre of North Korean industry but now rusting – is considered backward even by the standards of the North.

Still, life there was “OK”, says Park. After 10 years of schooling, he had secured steady work in a munitions factory making bullets and grenades. But in the mid-1990s, a devastating famine struck, compounding shortages that followed the collapse of the Soviet Union; soon Park’s friends and workmates were facing starvation. “We were eating only three meals a week, sometimes even eating tree bark because that was all we had,” he recalls, sitting on the floor of a Korean restaurant in southern Seoul, the table crowded with bowls of the vegetables and rice, plates of fish and dishes of kimchi and pancakes he could once only dream about.

Then people started dying. “From 1995, four people were dying each day from the hunger.” Realising his fate if he remained in the North, Park started plotting his family’s escape. He surveyed the Tumen river, which separates North Korea from China, and befriended the guards patrolling the border. Finally, one night, he bribed one of the soldiers and escaped with his family into China. A gruelling journey followed, during which both of his parents died and his sister was captured by human traffickers hoping to sell her to a Chinese man. Park, alone and bewildered, found his way to the South Korean embassy in Beijing and eventually flew to Seoul.

Upon arrival in the South, refugees are sent to a government centre called Hanawon, where they spend 10 weeks learning about Southern culture as well as practical skills such as how to use a computer, a bank card, a mobile phone and the subway. As they leave, they receive government payments. A single refugee gets a lump sum of $3,000 for basic assistance, a further $7,000 paid out over the following two years, and $10,000 for housing – meant to cover five years’ rent. (This $20,000 is a sharp reduction from 2004, when a lone refugee could expect $35,000, and the amount is set to be cut further this year.)

Park blew most of his grant on drinking, karaoke and playing pool. “In North Korea we have no concept of money or budgeting or saving, so once we get here we don’t know what to do,” he says, shrugging his shoulders. With his downbeat expression, shaggy hair and black “Hugo Boos” (fake Hugo Boss) jumper, Park cuts a rather pitiful figure.

Not realising he had to be careful with his national identity card, he discovered that new acquaintances had racked up huge mobile phone bills in his name. He found a job in a bar to pay the debt, but soon had to quit because he got into fights with customers who mocked his country-bumpkin accent. He tried working as a broker for escaping North Koreans but that enterprise landed him in jail, charged with forging the documents North Koreans need to win passage to the South. Upon his release he discovered his girlfriend, also a refugee, was pregnant and had only $8 to her name. “I felt so frustrated with the treatment I received,” says Park, jobless again. “I spent three months in jail while my girlfriend was pregnant and now the government calls me a criminal. I think it’s the South Korean government that’s criminal, not me.”

After the Korean war ended in 1953 and the division of the peninsula, Pyongyang operated under a strict policy of isolationism, keeping people in and information out. In the four decades that passed between the Korean war and the end of the cold war, only 600 North Koreans sought asylum in the South. The vast majority were elite men – diplomats, party cadres or military officers. Upon their arrival in Seoul, they were celebrated as heroes, their defections portrayed as a triumph of capitalism over communism. With their high levels of education, social skills and ready-made jobs at government think-tanks, these early defectors easily slotted into South Korean society.

But that all changed after the North Korean famine of the mid-1990s, which killed an estimated 2 million people, or almost 10 per cent of the population. The escaping North Koreans were no longer elites seeking political respite but unskilled workers from rural areas who were driven into China by hunger. Between 1994 and 1999 the number of North Koreans arriving in the South rose to 50 a year, but then started multiplying rapidly, increasing from 312 in 2000 to 1,894 in 2004. The number of refugees living in the South this year passed the 10,000 mark.

Now, three-quarters of defectors are women, the vast majority in their 20s and 30s. About 80 per cent of the total are from North Hamgyong province, whose rocky landscape is not well suited to agriculture and left the residents most vulnerable to the famine. As far from the showcase capital of Pyongyang as it’s possible to get in North Korea, Hamgyong has long been home to those considered undesirable in the rest of the country, and is believed to house several of the labour camps where those deemed politically unreliable are put to work.

Nanyang, seen from across the border in China - a common escape route

Nanyang, seen from across the border in China - a common escape route


The vast majority of those fleeing North Korea escape across the Yalu or Tumen rivers, which form the 1,400km border with China, swimming and wading in the summer or running over the ice in the winter. The border is increasingly heavily monitored on both sides, and those captured by North Korean or Chinese police risk repatriation and the labour camps – or worse.

Most of those who do make it across spend about three years hiding in China before making their way – with the help of Christian missionaries or expensive brokers (charging anywhere from $3,000 to $30,000) – to countries such as Mongolia, Thailand or Vietnam, where they claim asylum and are sent to South Korea. There, a hero’s welcome is far from what they receive.

According to a 2004 survey, half of South Koreans hope for “gradual unification” with the North, while 39 per cent say their ideal would be “prolonged friendly coexistence”. President Roh Moo-hyun feels the same, saying he wants Korean unification “through a predictable process”. And as Seoul has tried to warm relations with Pyongyang through its “sunshine policy” of engagement – seeking to lessen the burden of eventually absorbing the North – so it has become loath to do anything that might antagonise Kim Jong-il and his regime, a category into which encouraging defection falls.

“The South Korean government does not have any intention of fostering the North’s collapse,” Roh said during a visit to Berlin two years ago. “Germany paid a high price to realise national unification and is still suffering from it. I hope Korea will not undergo the same.”

In fact, the cost of Korean unification is likely to be much higher than it was in Germany. In 1989, East Germany’s gross domestic product per capita was one-third of West Germany’s, and about 80 per cent of the German population lived in the West. But on the Korean peninsula, the North’s GDP per capita is about one-15th of the South’s, and the populations are more evenly divided, with only two-thirds of Koreans living in the South.

South Korea’s main preoccupation has been the financial and economic cost of unification, with young people in particular expressing concern over the impact that sudden unification might have on their high-tech, conspicuous-consumption lifestyles.

But this is obscuring a much bigger challenge – that of social integration. “There will be a lot of social problems, especially with this rather large middle class that is forming in North Korea,” says Andrei Lankov, a professor at Kookmin University in Seoul who once studied in Pyonyang. “What will South Korea do with people who are called engineers but who have never seen a computer?”

When Lee Ji-su arrived in Seoul four years ago, she found herself almost intoxicated with the opportunities South Korea offered. After 27 years of repression, brainwashing and then hunger in North Korea, and a terrifying journey through China, she arrived in a country of riches and possibilities she could not have imagined. “I was so excited about my new life. I wanted to get out there, into the real South Korea, as soon as possible,” says Lee, sitting on the floor in her cramped apartment in a commuter town outside Seoul. On the bustling main street, construction companies are building flash new apartment towers, and limousine buses zoom back and forth to the capital.

Lee, now 32, comes from Chongjin, a rusting port city in North Hamgyong not far from China. An accordion player, she was in the local Korean Workers’ party band. At rallies to whip up loyalty for Kim Il-sung and his son Kim Jong-il, she had to play songs such as “My Country, The Best Country” and “Kim Il-sung, Sing of the Love For Him”.

Because of her privileged position as a member of the Korean Workers’ party, Lee was well-off, living in a comfortable apartment, eating well, playing her music and enjoying something of a bourgeois lifestyle. But as the famine took hold and her mother died, Lee had to fend for herself. She started exporting dried fish to China to raise money, using the proceeds to buy cheaper foodstuffs for herself. “I was in the Workers’ party performance team so I had received a lot of political education,” she says. “But when I got to China I saw how much richer than us they were and I watched some South Korean TV. Then I realised just how much the regime had lied to us.”

The myth of Kim Jong-il’s “socialist paradise” exposed, Lee started using her fish-selling trips to investigate the opportunities for crossing the border and not returning. After several such trips, she started the arduous journey to South Korea.

Although it would be impossible to pick out Lee, with her carefully made-up face, gold dangling earrings and (fake) Prada bag in a South Korean crowd, neither her life in North Korea nor her time at Hanawon prepared her for the rigours of the South. She got a job as a waitress but the owner paid her only $300 a month, not the $1,300 he had promised; the work proved gruelling, and the customers looked down their noses at her. “South Koreans think the North Korean accent sounds very crude, so people treated me as ignorant,” she says, admitting this hit a nerve since she didn’t even know how to use a credit card when she first arrived.

In a survey of 300 North Korean refugees living in Seoul, half said they felt they were viewed as second-class citizens and the same proportion labelled discrimination the most difficult thing they had to cope with.

“Some South Koreans say things to me like: ‘It’s OK for you, you don’t have to work here because the government pays you with our taxes.’ I find that very distressing,” she says. “Even at the local council office, they say things like: ‘Why aren’t you at work?'” She had been living on instant noodles for the three days before our interview, and both she and Park asked to use aliases for fear of angering South Koreans.

Although Lee now has a job as an office assistant, for many, work is a struggle. Unemployment among refugees is at about 40 per cent – compared with 3 per cent for the general population – and those with jobs usually hold temporary or otherwise inferior positions. “We get ‘3D’ jobs,” says Lee. “Jobs that are dirty, difficult or dangerous.”

Defector Kim Seung-chol

Defector Kim Seung-chol


Then there is the challenge of forging new relationships. Marriage between South Koreans and previously married North Koreans is a legal minefield – what happens if the former spouse shows up in the South? – and social differences exist even at home. About 70 per cent of inter-Korean marriages end in divorce. Kim Seung-chol, a gaunt salaryman who married a South Korean woman a decade ago, tells me: “In North Korea, women feel happy when their husband brings home the bacon.” But “in South Korea, women need more than just money,” he says. “They want to communicate with their husbands and have fulfilment and things like that. I advise new arrivals that in South Korea they have to tell their wives that they love them every day – but they just laugh, they can’t believe it.”

Some experts argue this sort of advice should be harnessed by Seoul, with the government using refugees’ first-hand knowledge of both the North and the South rather than ostracising the new arrivals. Lankov says: “The number of refugees has reached 10,000 and Korean newspapers call this a ‘flood’ or ‘exodus’. But look at what was happening in Germany in the 1960s, 1970s, 1980s. The average number of people flowing from East to West each year was 21,000.

“These refugees are the avant garde of unification, and sooner or later unification will happen – whether people like it or not. The experience of dealing with these people will be very useful when the South has to cope not just with 10,000 but 24 million refugees.”

At tae kwon do practice in a classroom filled with the smell of teenage boys, Oh Tae-hoon’s face breaks out into a large smile as he kicks his buddy in the chest, his skinny frame rattling around in a protective vest. Born in North Hamgyong, Oh is 17 years old but the same size as a Southern 13-year-old.

Oh was six when his mother deserted the family during the famine. After his father died in 2000, he was alone. “I would hang around on the streets with a friend who also had no parents, looking for food or just killing time.”

Because he lived near the border, he learnt a lot about China, and saw chances for a better life elsewhere. One night in December 2003, he swam across the Tumen river, then walked and cadged rides to Mongolia, where missionaries helped him claim asylum in South Korea. But with no family in the South, Oh was sent to a special school south of Seoul, where he has lived in the dormitory since.

Because he is not an adult, Oh did not receive any lump-sum payments after Hanawon. Instead, he gets $50 pocket money a month from the government – sometimes enough to get by, sometimes not. But after years of living on the streets and skipping school, settling into life as a South Korean teenager is not easy. “I didn’t have much chance to study before I came here so I don’t know the basics,” he says.

Although Oh is a special case, learning is a struggle for most children from North Korea. Joanna Hosaniak, a Pole, works at the Christian NGO Citizens’ Alliance in Seoul, which runs the Hankyoreh Seasonal School where Oh is a pupil. She says many of the children live “almost like wild animals” while in China, so have trouble integrating into South Korea. “They look to their parents for emotional warmth,” she says, “but very often the adults themselves have so many problems that they can’t give that kind of care to their children.”

Indeed, after a repressive life in the North, followed by dangerous and stressful journeys through China, children and adults alike arrive in South Korea suffering from malnutrition and post-traumatic stress disorder. Simple things such as living in an apartment can become a “psychological killer”, says Chung Byung-ho, a cultural anthropologist who helps North Koreans integrate into the South.

“Most of these people have never lived by themselves, then suddenly they are given an apartment, and when they close the door, they feel that nobody cares,” he says. “Socialist societies never leave people alone – they are always interfering, organising, mobilising.”

All this is compounded by the unimaginable level of brainwashing North Koreans experience in the world’s most aggressive personality cult. For many refugees, Christianity fills the gap and helps refugees cope with the South’s sink-or-swim policies. More than half of refugees were baptised during their years in hiding in China, where mainly Protestant missionaries provide the support networks so many refugees lack. To help lay the groundwork for social unification, South Korean attitudes may have to change. “South Korean people no longer think of this as subsidising heroes but as subsidising migrants,” says Chung.

Lankov, meanwhile, has suggested in a report on refugees for the US Committee for Human Rights in North Korea, that Seoul do more to encourage elite defection, perhaps increasing the payments made to people who bring valuable information and skills with them. Refugees should also be provided with more educational opportunities once they arrive in the South. Although they might not be particularly suited to academic study, they could benefit from more vocational training, he says.

Indeed, the hope of many young refugees knows no bounds. Fifteen-year-old Hong Sung-min had been living in South Korea for only two weeks before starting at the Hankyoreh school, alongside Oh, in January. With a broad smile across his spotty face, he is full of excitement about what life in the South could offer. “I am interested in foreign languages, especially English and Chinese. And I want to own my business later in life,” he says between lessons. “Yes, I want to be rich.”

Media Should See Press Room Closure As An Opportunity

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By Michael Breen
Intended for The Korea Times
Friday, June 1, 2007

The war between President Roh and the mainstream media went nuclear last week when the government announced a plan to close press rooms in ministries and change how it deals with journalists.

Right now, the prevailing opinion is that the move is a vindictive attack on press freedom, akin to that made on the other side of the world by Venezuelan leader Hugo Chavez, who has closed a TV station that criticized him.

In evaluating this news, we should always remind ourselves when the press itself becomes a story that it, to borrow from Karl Marx, owns the means of production. In other words, they are telling the story. That’s why right now theirs is the prevailing view.

But there are two more sides to factor in. One is the government’s and the other is “the people’s.” How will they benefit or lose from the new policy?

My view is that all sides can win. President Roh is making a historic move here, cutting the umbilical cord with the media, just as he cut the judiciary and ruling party from the executive Blue House when he came into office.

Viewed coolly, the government plan for restructuring its relationship with the media is almost certain to lead to more rational and articulate government public relations. At the same time – although this is not a government concern – it presents the press with an opportunity to be more professional and competitive. The winner will be the electorate, who although enjoying increasing freedoms in recent decades, is patchily informed by its media.

Here’s what will happen.

Specifically, in August, government will reduce the number of briefing rooms, close press rooms in ministries and police stations, and start distributing government announcements and take everyday questions from reporters online.

This is a big change from the present system. Readers may not be aware, but most newspapers structure their reporting around government ministries. In other words, individual journalists are assigned to specific ministries.

This is unusual. It makes sense for reporters to be dedicated to the Blue House and the one of two ministries that are a major source of important news. But it doesn’t make sense to have reporters in 37 government agencies.

For example, you would expect a reporter covering, say, health, to have a desk in his own newspaper and go out to meet sources and find stories about hospitals, government policy, research, the pharmaceutical industry and so on. Here, he works out of the Health and Welfare Ministry.

In the past, this system was a form of press control. The authoritarian government could keep an eye on reporters and spoon-feed them information.

One consequence in democratic Korea is a continuing bias, not so much in favor of government, but in favor of old top-down Korea. Most information and opinion, you see, still flows down from government. It flows from producer to consumer. From the powerful to the powerless.

Check your paper for the number of stories that are announcements from government. Check also and see how few news or feature stories are really about ordinary people. (When there are profiles of individuals, it’s not because their stories are intrinsically interesting, but because they have made the country proud, like won golf tournaments, best actress awards, or come third in Miss Universe.) That is because media are a form of elite whose historic mission has been to educate and guide the unwashed masses with an eye to perceived national interest. The unwashed masses are not themselves very interesting.

But we live in a democracy now. Korea is being increasingly driven from the bottom up, by the consumer, by the voter, by the individual. It’s time the press caught up with the times.

Another consequence of press rooms is that reporters develop close ties with officials who leak them confidential information that – sorry, reporters – the public has a right to know that the government is protecting.

From a public relations perspective, these relationships need to be established on a professional footing. Government should speak with a unified voice to avoid confusion. In Korea, however, ministries say different things and even officials within ministries contradict one another. As large companies learned long ago, the way to deal with that is both limit and train those who are talking to reporters. (This is bad news for reporters, but good news for anyone they write about).

Another feature of the ministry-based reporting system is press clubs. Each ministry’s press corps has one. This leads to a strange tendency in Korean journalism whereby reporters covering the same field – or “beat,” as it is called – view one another as colleagues, not as competitors. Club members often agree not to “scoop” others for fear of upsetting group harmony. Far from competing, they tend to share information. The real rivalries are between reporters from the same newspaper. This is one reason why newspapers are so similar.

These clubs, incidentally, have successfully pressured government not to allow foreign reporters into briefings. In fact, this issue is scheduled to be tabled by the EU as a trade matter for the upcoming FTA talks.

So, why is Mr. Roh doing this? The fact it has come so late in his term – Mr. Roh will step down in February – suggests that it was an afterthought. Indeed, critics charge that Mr. Roh is being vindictive. This may be true. But even so, it’s a well thought-out response. (Officials studied how OECD member governments dealt with media before coming up with the plan)

Many reporters feel the plan is an attack on their freedoms. “The new measure will not only harm reporters’ objectivity toward government policies, but will also infringe upon the public’s right to know,” the Korean Association of Newspapers said in a statement.

This perception comes from a natural anger that the level of access to government is going to change. Now reporters will have to meet with official spokespeople only and formally apply for interviews with other officials, rather than just drop into their offices.

Nothing is more annoying to reporters. But it does not mean their freedom is being curtailed. What is really infringed upon is the reporter’s right to roam rather than the public’s right to know.

My advice to publishers and editors is to recognize the historic moment and respond competitively.

Why only the well connected thrive

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By Anna Fifield
http://www.ft.com/cms/s/0/8b04772c-b4bd-11db-b707-0000779e2340.html
Published: February 5 2007 02:00 | Last updated: February 5 2007 02:00

While South Korea has many large business groups, only a few have succeeded in becoming competitive in overseas markets, says Kwon Oh-seung, the head of the Fair Trade Commission, writes Anna Fifield.

That is partly because of the lack of competition at home and the distorted supply chains that favour companies with links to chaebol rather than small and medium enterprises, so called SMEs, without such relationships.

“If you do not belong to a large business group, it is very difficult to do business,” Mr Kwon says. “That is especially true for SMEs: they cannot grow into large companies. I’m very concerned about that and want to correct this situation so that companies can grow in the domestic market and then enter the international market.”

For example, in the electronics market, Samsung and LG belong to business groups with many affiliates, so there is “direct or indirect pressure” to buy products from affiliates and only those companies that have links or relationships to the affiliates get contracts, Mr Kwon says. “That hampers competition in individual markets,” he adds.

Hank Morris, a business consultant, agrees that chaebol are stifling the development of South Korea’s small and innovative businesses.

“Chaebol companies have been known to tell potential customers that if they deal with such-and-such then they won’t get any business from them,” Mr Morris says. “They are essentially trying to corner the market by using unfair tactics. These threats can be very intimidating and they can make it very difficult for small companies to survive.”

S Korea watchdog tries to rein in cartels

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By Anna Fifield in Seoul
http://www.ft.com/cms/s/0/00d89e1e-b479-11db-b707-0000779e2340.html
Published: February 4 2007 23:25 | Last updated: February 4 2007 23:25

South Korea’s Fair Trade Commission has pledged to this year take an even tougher line against companies that allegedly abuse their market dominance, focusing on cartels and mergers in particular.

Kwon Oh-seung, the FTC chairman, said companies outside the chaebol conglomerates need a chance to grow. “In the past we have been focusing on unfair practices,” Mr Kwon, who took over leadership of the FTC last year, told the Financial Times. “But from this year we will strengthen our law enforcement on the abuse of market dominance and merger control.”

His vow comes as the National Assembly prepares this month to consider ­government plans to ease restrictions on South Korea’s big businesses, allowing them to invest more in their affiliates. This runs contrary to Mr Kwon’s attempts to impose tougher regulations on cross-investment among chaebol companies such as Samsung and Hyundai, and curtail their ability to control megalithic enterprises with single-digit shareholdings. Instead, Mr Kwon will this year turn to enforcing competition law.

“There is no problem with large companies who have become large through their competitiveness but companies that are dominant in the market should not abuse their dominance. We’re going to strictly regulate or prohibit any anti-competitive practices,” he said.

The watchdog is already active. In the past year it has launched investigations into Qualcomm and Intel, the US technology companies, and forced Microsoft to unbundle the Korean version of its Windows operating system, as well as fining it Won33bn ($31m).

Last month it fined Hyundai Motor Won23bn for violating competition rules by putting excessive pressure on its independent car dealers to promote sales.

Mr Kwon said he saw “some concerning signs” that Hyundai Motor was becoming unfair but the carmaker is already bristling at the FTC’s new-found muscularity.

“These investigations are very intrusive,” said Oles Gadacz, Hyundai spokesman. “How can a government agency decide where we can have distributors?”

Hyundai has been going through a tumultuous period, which will come to a head on Monday when a Seoul court delivers its verdict on chairman Chung Mong-koo, who is charged with embezzlement and breach of trust. Prosecutors are seeking a six-year jail term.

In the 1960s and 1970s, South Korea’s chaebol propelled the then poor country’s explosive growth. Now, South Korea is the world’s 10th largest economy, yet the family-run conglomerates have become what some see as untameable beasts in need of reining in.

Rather than pursue a crackdown on the chaebol, South Korea’s government is pushing a plan to ease the regulations that govern the conglomerates and the often tangled shareholding structures via which their controlling shareholders run vast industrial empires, often with formal shareholdings of 5 per cent or less.

The National Assembly is this month to consider a change that would see the number of companies subject to cross-shareholding restrictions fall from 343 units of 24 chaebol to only 24 companies belonging to seven groups.

The finance ministry says the move is intended to encourage corporate investment, which is forecast to slow sharply because of economic uncertainties caused by the strong won and December’s presidential election.

The view is backed by industry groups. According to the Federation of Korean Industries, the country’s 30 largest business groups expect to invest Won52,000bn this year, only 0.6 per cent more than in 2006.

The finance ministry argues that any efforts to tame the chaebol would potentially halt an already slowing economy. Indeed, within South Korea there is a fear that the country’s GDP would not grow without the chaebol.

But Mr Kwon, whose efforts to push through stricter cross-shareholding limits have been stymied by the government, argues that the new rules will simply help distort the Korean economy further.

Many analysts say it is time for Korea to wean itself off its dependence on both the chaebol and on manufacturing, for it to start developing the service sector, and to allow small- and medium- size enterprises – which employ 80 per cent of the working population – to grow.

Mr Kwon argues that in Korea “power is concentrated in too few hands”, singling out Samsung, Hyundai Motor, Hyundai Group, LG, SK and Doosan as the main offenders.

“When I compare Korea with other countries, like the US, the UK, Germany, I see that large business groups here have the power to hamper the functioning of markets so I am very concerned,” Mr Kwon says.

The chaebol have vehemently resisted attempts to curb their power. Lee Seung-chol of the FKI chaebol club argues that the restrictions on large business that the FTC wants to pursue are simply “wrong”.

“Even though big companies dominate the domestic market they don’t dominate international markets. In a global, open economy, market share does not equate to market power,” he says.

S Korea tries to clip wings of the chaebol

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By Anna Fifield in Seoul
http://www.ft.com/cms/s/0/708700b0-b4a7-11db-b707-0000779e2340.html
Published: February 4 2007 23:43 | Last updated: February 4 2007 23:43

In the 1960s and 1970s, South Korea’s chaebol propelled the country’s explosive growth, helping to transform it from one of the world’s poorest countries into an Asian tiger.

Now, South Korea is the world’s 10th largest economy yet the family-run conglomerates have become what some see as untameable beasts in need of reining in.

“The chaebol have become too powerful,” argues Kwon Oh-seung, the chairman of the Korean Fair Trade Commission and the anti-trust regulator leading the charge to stop what he sees as the conglomerates’ distortion of the Korean economy.

But rather than pursue a crackdown on the chaebol, South Korea’s government is pushing a plan to ease the regulations that govern the conglomerates and the often tangled shareholding structures via which their controlling shareholders control vast industrial empires, often with formal shareholdings of 5 per cent of less.

The National Assembly is due this month to consider a change that would see the number of companies subject to cross-shareholding restrictions fall from 343 units of 24 chaebol to just 24 companies belonging to seven groups.

Under the current regulations, chaebol affiliates with assets of more than Won2,000bn ($2.14bn, €1.65bn, £1.09bn) belonging to groups with assets of more than Won6,000bn are prohibited from holding more than 25 per cent of shares in an affiliated company.

Under the proposed revision, only chaebol with assets of more than Won10,000bn will be affected. Furthermore, the cross-shareholding limit will be relaxed to allow companies to hold up to 40 per cent in affiliates.

The finance ministry says the move is intended to encourage corporate investment, which is forecast to slow sharply because of economic uncertainties caused by the strong won and December’s presidential election.

The view is backed by industry groups. According to the Federation of Korean Industries, the country’s 30 largest business groups expect to invest Won52,000bn this year, only 0.6 per cent more than in 2006.

The finance ministry argues that any efforts to tame the chaebol would potentially hobble an already slowing economy. Indeed, within South Korea there is a fear that the country’s GDP would not grow without the chaebol.

But Mr Kwon, whose efforts to push through stricter cross-shareholding limits have been stymied by the government, argues the new rules will simply help distort the Korean economy further. Mr Kwon says the current limits can already see affiliates control 40-45 per cent of a chaebol company while owners technically hold just 5 per cent.

“The affiliates of large business groups can survive even if they are not competitive,” he says. “I wanted to make the market function properly so that all those who make quality goods can survive in the market.”

Many analysts say it is time for Korea to wean itself off its dependence on both the chaebol and on manufacturing, for it to start developing the service sector, and to allow small and medium size enterprises – which employ 80 per cent of the working population – to grow.

The huge size of the chaebol is being called into question, especially as Samsung and Hyundai Motor prepare to install third-generation chairmen, a process aided by complex webs of cross-shareholdings.

Mr Kwon argues that in Korea “power is concentrated in too few hands”, singling out Samsung, Hyundai Motor, Hyundai Group, LG, SK and Doosan as the main offenders.

Samsung, the biggest chaebol, now has more than 60 affiliated companies – ranging from hotels and a securities trader to shipbuilding and petrochemicals – and accounts for almost a quarter of the Korean stock market’s capitalisation and more than 20 per cent of total exports.

“When I compare Korea with other countries, like the US, the UK, Germany,– I see that large business groups here have the power to hamper the functioning of markets so I am very concerned,” Mr Kwon says.

The chaebol have vehemently resisted attempts to curb their power. Lee Seung-chol of the FKI chaebol club argues that the restrictions on large business that the FTC wants to pursue are simply “wrong”.

“Even though big companies dominate the domestic market they don’t dominate international markets. In a global, open economy, market share does not equate to market power,” he says.

But analysts see logic in Mr Kwon’s calls for stricter monitoring. “The resources that the chaebol can deploy are massive compared with their potential competitors,” says Hank Morris, a business consultant in Seoul. “So it makes sense for the government to play referee and be on the look-out for dirty tricks.”

Lone Star takes KEB dividend

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By Song Jung-a in Seoul
http://www.ft.com/cms/s/0/bed3bb0c-b2a7-11db-99ca-0000779e2340.html
Published: February 2 2007 10:38 | Last updated: February 2 2007 10:38

Lone Star, the US private equity fund, will receive an annual dividend of Won416.7bn from Korea Exchange Bank, recouping almost a third of its initial investment in the South Korean lender that the fund has been trying to exit.

KEB, in which Lone Star has a 64.6 per cent stake, will pay Won1,000 a share to stockholders in its first payout in a decade, despite a 48 per cent drop in earnings last year. The resulting dividend yield of 7.6 per cent is the highest for an Asian bank, but still below market expectations.

Lone Star had been widely expected to seek an even higher dividend from KEB after its $7.4bn deal to sell the lender to Kookmin Bank broke down late last year amid an extensive inquiry over its 2003 purchase of the bank. The fund could have pocketed up to $4bn if the deal had been completed. One local analyst suggested a month ago that the dividend could be set at Won2,700 a share.

Seven directors, including two from Lone Star, decided on the dividend payout at a late video conference on Thursday, considering “the bank’s financial health and strong capitalisation,” KEB said.

KEB reported a net profit of Won1,006bn last year, compared with a record high profit of Won1,930bn in 2005. The bank said its profitability continued to improve, excluding one-off gains made in 2005. Its overdue loan ratio improved to 0.77 per cent from 0.93 per cent.

Analysts said Lone Star appeared to have decided on a lower-than-expected dividend, given negative public opinion against it taking profits out of the country and concerns that a higher payout might cut KEB’s value.

“The dividend level seems reasonable. They gave up short-term gains somewhat for longer-term profit,” said Kim Jin-sang at Nomura International. “Excessive dividend-taking at this stage is not good, if they want to sell the bank at a higher price.”

Lone Star will actually receive Won354.2bn as it has to pay a 15.4 per cent tax on the dividend. KEB said its capital adequacy ratio, even after the payout, will remain above 12.4 per cent, higher than the average for Korean commercial banks. The bank had not paid a cash dividend to shareholders since 1996 as it struggled with heavy losses in the wake of the 1997 financial crisis.

Lone Star is expected to resume efforts to sell KEB once the ongoing probe by Korean prosecutors over alleged misconduct surrounding its acquisition of the bank is concluded. Prosecutors indicted Paul Yoo, Lone Star’s head of Korean operations, last week for alleged stock price manipulation and tax evasion.

They are also requesting the extradition of Ellis Short, Lone Star’s vice chairman, and Michael Thomson, general counsel, for questioning over allegations that they conspired with government officials to unfairly take over KEB.

Separately, Shinhan Financial Group, the country’s second-largest lender, reported Friday that its profits last year rose 17.4 per cent to Won1,833bn on the strong performance of its banking and non-banking units. The group is set to take over LG Card, the country’s top credit card firm, this quarter.

Flaws in Korea in spite of a cutting edge

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By Anna Fifield
http://www.ft.com/cms/s/1/4e7b6354-b073-11db-8a62-0000779e2340.html
Published: January 30 2007 18:24 | Last updated: January 30 2007 18:24

Diamond Dilemma
Shaping Korea for the 21st Century
By Tariq Hussain
Published in Korean by JoongAng Random House; available in English from www.lulu.com/diamonddilemma, $18.95

One of the biggest surprises when listening to Korean executives discussing business in their country is the level of complacency about the need for further corporate reforms.

“We have changed so much since the financial crisis,” they regularly say, citing the establishment of audit committees and the ap­pointment of outside directors.

It is true that the 1997 crisis and the spectacular collapse of the Daewoo conglomerate preceded wide-ranging improvements in corporate governance practices. At the same time, Korean companies have metamorphosed from copycat manufacturers into world-class producers of mobile phones, computer chips and cars.

But many of the governance changes have been superficial and are aimed at appeasing shareholder de­mands without eroding the founding family’s control.

The continuing shortcomings in corporate Korea have been starkly illustrated just in the past year by scandals at the two largest chaebol conglomerates – Samsung’s chairman is suspected of consolidating family power by illegally transferring equity to his son, and the head of Hyundai Motor is facing prison for operating slush funds.

The chaebol conglomerate groups are the cornerstones of the Korean economy, but if they continue to operate in this way they will soon go from economic champions to economic millstones.

In Diamond Dilemma, Tariq Hussain, a German who speaks fluent Korean and has worked as a management consultant in Seoul for the past decade, acknowledges the significant prog-ress made by corporate Korea since the crisis.

But, as he says in this constructive book, Korea needs continued reform to achieve its “brilliant” potential: “Korea is a diamond. It is small, tough and has proven its potential to shine,” Mr Hussain writes. “However, Korea is still unfinished. It has not yet been cut into its final shape and therefore underestimated by many who do not know it. Korea’s future could be literally bright – or the country could fail to achieve its potential and lose its shine.”

The diamond analogy on which the book, published in Korean last year and now being released in English, is predicated becomes a little strained by the end of the book. But as well as offering a concise, readable history of Korea’s astonishingly fast industrialisation from one of the world’s poorest countries half a century ago to the 10th largest economytoday, it also lays out in broad terms the areas that the nation must focus on if it is to avoid squandering its gains.

“Much of Korea’s dynamism is happening at the edges, and not at the core of the economy,” Mr Hussain says. “Korea Inc is still holding on to its old ways of doing business, and not changing fast enough to cope with necessary changes.”

Government rules and regulation remain too rigid and union militancy is still a major problem; but most of all Korea is too dependent on the chaebol and the few products they make.

If it continues on this path, Korea could fall into a German or Japanese-style rut, Mr Hussain warns. “Korea has emulated the best of Germany and Japan when it rose to prominence – it should avoid learning the worst as well,” he says, adding that Korea is already saddled with the worst aspects of each of those two countries – respectively, rigid labour unions and an overactive government.

To ensure it continues to shine, Mr Hussain says, Korea must be more aware of the threat of China, which is catching up with Korea in almost all industries.

Second, it should stop the chaebol from falling back into their pre-crisis habits and from operating under the assumption that they are too big to fail or be challenged.

Third, Korea needs a new generation of companies that are not dependent on the government or on the chaebol to drive future growth.

Fourth, foreign direct investment remains “woefully low” because of an overactive government, un­welcoming labour unions, and continued scepticism towards foreign companies, Mr Hussain says.

Korea is now at a critical juncture where it must choose between reaching its full potential as an entire economy, rather than just a few outstanding individuals, or carrying on, missing opportunities and facing economic stagnation.

“The new way of thinking will not be about ‘trying harder’ – rather, it will be about trying a different approach: for government, chaebol owners, and labour unions to let go of their grip on the economy and society,” he says. “Only then can Korea’s economy and society overcome its rigidities, factions and pseudo- globalisation.”

Samsung’s chairman Lee Kun-hee once famously ordered his executives to overhaul the electronics company with the directive: “Change everything but your wife and kids” – a lesson the Korean economy as a whole could learn from.

South Korea to encourage investment abroad in bid to curtail rise in won

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By Anna Fifield in Seoul
http://www.ft.com/cms/s/0/9d658a58-a506-11db-b0ef-0000779e2340.html
Published: January 16 2007 02:00 | Last updated: January 16 2007 02:00

The South Korean government yesterday unveiled its much-heralded measures to encourage companies to invest more abroad, exempting domestic investors from capital gains tax on overseas equity earnings and easing restrictions on foreign real estate purchases.

Concerned about the impact of the soaring won on exporters such as Samsung Electronics and Hyundai Motor, the central bank has been intervening heavily in foreign exchange markets at the same time as the finance ministry tries to engineer a longer-term solution by encouraging greater capital outflows.

Among the measures announced yesterday, domestic investors will be exempt for three years from capital gains taxes – currently 14 per cent – on earnings from overseas equity investments. Pension funds will be allowed to invest in overseas securities.

The cap on investment in overseas real estate was raised from $1m to $3m (€2.3m, £1.5m), and the finance ministry signalled the limit would be scrapped within three years. To increase financial support for Korean exporters, the state-run Export-Import Bank will issue Won1,700bn ($1.83bn, €1.42bn, £950m) in won-denominated bonds this year.

“We expect a considerable effect,” Kwon O-kyu, finance minister, said of the changes. “The measures will probably lead to an annual outflow of capital worth $10bn to $15bn,” he said, describing this as a conservative estimate.

The won rose by about 9 per cent against the US dollar last year, leading the Bank of Korea to intervene heavily in the currency markets. Its foreign exchange reserves, the world’s fifth largest, rose by $4.7bn last month to $239bn.

South Korea is gradually abandoning its decades-long practice of limiting outbound investment, an attempt to keep its wealth at home but which has contributed to a surplus of foreign currency and exacerbated the recent upward pressure on the won.

“The measures are to maintain a balance of the supply and demand in the foreign currency market by promoting an outflow of foreign currencies and adjusting the inflow to an optimum level,” the finance ministry said.

However, analysts said the package was more limited than hoped and would have little impact in the short term. “This is definitely not a big bang,” said Oh Suk-tae, economist at Citigroup in Seoul. “The main change is in tax exemptions but tax is not the primary concern for investors – the market outlook is much more important.”

Likewise, South Korean real estate investors are most interested in the US market, but are likely to be influenced more by concerns about a housing slowdown there than the easing of restrictions.

For that reason, Mr Oh was sceptical about the finance minister’s estimates of the impact, saying the recent surge in outbound equity investment took the total invested to $12bn last year. The government’s expectation of doubling that looked excessive, he said.

Yesterday’s measures would not offer any immediate respite for South Korean exporters suffering from the strong won, said Lim Ji-won of JP Morgan.

“The mid-term effects are probably quite meaningful but I’m not sure how much short-term impact it will have,” she said. “The Korean won appreciation is driven by exporter-selling so it depends on whether exporters’ expectations of the won’s strength will be undermined by this.”

*US and South Korean negotiators yesterday began a sixth round of talks on a $29bn trade accord after failing to reach an agreement last year and with only a few months left before US authority to deal expires, Bloomberg reports from Seoul.

South Korean imports of US beef, one of the most contentious issues, must be resolved separately, Wendy Cutler, assistant US trade representative, said. Anti-dumping rules, drugs and automobiles also would not be formally discussed.

President George W. Bush’s administration is rushing to reach trade agreements with countries including South Korea before its ability to present Congress with complete deals for approval expires in July.