Why the world is turning Korean first, and then Japanese

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(China Daily)
Updated: 2008-11-20 08:10

Wandering around downtown Seoul the other night, I couldn't miss the irony of a song pumping out of a karaoke club: "Turning Japanese".

I had spent the day at a conference sponsored by the Seoul metropolitan government pondering whether Asia risked its own "lost decade". The Vapors tune was popular in the 1980s as Japan thrived. Now, Japan and other parts of Asia are in a recession, or headed there.

The experience reminded me that the richest economies, including the US, are turning Korean before they go down the Japan road.

Among South Korea's key challenges over the past decade has been reining in the huge conglomerates towering over the economy. Business groups like Daewoo, Hyundai, LG and Samsung are credited with raising the nation from the ashes of the Korean War into the heights of the 13 biggest economies.

Not bad at all. That is, until you consider the dark side of an economy monopolized by a handful of omnipotent, politically connected powers. They sucked up the air start-ups need to increase innovation and create jobs. Worse, they took risky bets and over-expanded recklessly. When they crashed in the mid-to-late 1990s, they brought an entire economy down with them.

Doesn't that sound a lot like the US these days? As Wall Street's excesses went wrong, losses spilled over onto the laps of average households. While consumers who bought bigger houses than they could afford are also to blame, Wall Street proved more fragile than many pessimists expected.

The US spent much of the 1990s and 2000s creating too-big-to-fail institutions like Citigroup Inc and American International Group Inc. Well before that it created massive employers like General Motors Corp that are considered too risky to fail.

Now, as investment banks disappear before our eyes, executives at the heart of it are looking for government handouts. It's too late for average consumers. The subprime-loan crisis began on Main Street and spread to Wall Street. Now the plight of bankers losing everything is boomeranging back to Main Street.

When economists buzz about the US entering into a Japan-like funk, they rarely think about how the most advanced economy became so Korean.

This isn't a bash-Korea column. As the Federal Reserve communicated this month with a $30 billion swap agreement with Korea, Asia's fourth-biggest economy is far from a house of cards. It also has $212 billion of currency reserves and ample room to cut interest rates and increase spending. Korea has huge potential.

Yet the chaebol continue to dominate the economy. While their influence isn't what it was a decade ago, the names on the neon signs lighting up Seoul's skyline speak to the concentration of corporate power. It's a work in progress for Koreans, many of whom have a love-hate relationship with names credited with putting Korea on the global economic map.

The US is only now eyeing a similar cathartic break with a financial industry that grew too big. In a sense, the US reached a point where too many smart people were chasing riches managing wealth and all too few were creating it.

When the history of this crisis is written and credit is accorded to those who presaged it, Bill Gates deserves a mention. The founder of Microsoft Corp didn't predict today's turmoil the way Nouriel Roubini or Richard Duncan, author of the 2005 book The Dollar Crisis, did. He did warn of a shortage of engineers undermining the economy.

If more young Americans pursued engineering and technology rather than finance, the US would have a greater chance of maintaining its leading role. For now, the US is shackled with a financial system heavy with many of its best and brightest wondering where their next bonus will come from.

Economists such as the legendary Henry Kaufman are right when they argue policies that allow the creation of entities that are too big to fail undermine the very free-market discipline that champions of capitalism espouse. Any company whose failure could devastate an economy is one that never should have been created in the first place.

What's the answer to the problem? Better corporate governance and risk management, of course. One way is to make risk management the explicit duty of boards. That suggestion comes from Michael Schrage, a researcher at the Massachusetts Institute of Technology.

"The experience of the past decade shows that non-executive directors cannot rely on representations by management about risk exposure," Schrage wrote in the Financial Times on Nov 18. That goes as much for South Korea in the late 1990s as the US now. How can board members, credit-rating companies or regulators ever again trust the balance sheets with which they are presented?

The "shadow banking system" allowed Wall Street to subvert government regulations and enabled banks to make highly leveraged bets. Many chief executives just didn't know how vulnerable their institutions were.

The US didn't set out to become Korean. It's doing just that on the way toward turning Japanese.

William Pesek is a Bloomberg News columnist. The opinions expressed are his own.