Korea At A Crossroad

SEOUL: South Korea is suffering the blues. Its stock market is down as world markets rise. Growth has slowed, the external balance widened, the currency is soft, a single North Korean U-boat shakes confidence, terms of trade are bad, and the chaebols (the country's industrial conglomerates) are investing offshore. Policy choices, moreover, are confusing. Should the government seek a strong currency to boost confidence in the capital account or should it accept a weak currency for a strong current account and growth? Should it fight inflation or slump? Should it see these issues as transitory, or a deep structural crisis?

Perversely, a country that thought blindly imitating Japan was the way to prosperity has, instead, reproduced the very mistakes that broke the back of Japan’s economy. Among these are:

1. Statism - As in Japan, Korea's government is central to running the economy. Statism may be helpful at the threshold of development, where coordination and resource mobilization are needed. But in time governments cannot handle increasingly complex economic decision-making. South Korea is victimized by this, with the result that small and medium-sized firms, or new firms, are missing and industrial dinosaurs become another form of bureaucracy not much different from government.

2. Dysfunctional finance - For decades government allocated credit. Today that system cannot effectively channel credits to dynamic new firms.