Too Much Change, Too Fast, Could Hurt South Korea's Economy

Too Much Change, Too Fast, Could Hurt South Korea's Economy

STEVE FORBES

Steve Forbes source Reason.com

edited by kcontents

The warmongering behavior of the unbalanced dictator next door is not the only threat facing South Korea. The miraculous economic progress this industrious democratic nation has made over the last few decades could be jeopardized by proposed overzealous "reform" policies that might put some of Korea's most important industries at a global competitive disadvantage.

In the 1950s, Korea was one of the poorest countries in the world. Today it is the third-largest economy in Asia and a leader in industries including technology and automaking. Much of that success has been realized with the help of the "chaebols," huge family-run companies like Samsung, Hyundai and LG that have become international business powerhouses.

Samsung is a particularly important pillar of the South Korean economy, accounting for an estimated 20% of Korea's exports and GDP. Its electronics division alone pulled in $10 billion in profit last quarter.

But a political cloud has settled over the chaebols, with Samsung currently embroiled in legal actions related to alleged bribes between company Vice Chairman Lee Jae-yong and ousted South Korean President Park Geun-hye. Newly elected President Moon Jae-In won office on a populist liberal reform platform that promised to crack down on the way the chaebols are allowed to operate.

But the ties between South Korean elected officials and directors of the nation's top-performing businesses, which have drawn so much public attention and criticism of late, cannot be characterized as a simplistic tale of corporate greed and abuse of public power. They are complicated relationships that go back to the beginning of South Korea's rise from abject poverty to economic triumph.

It is unfair to judge today's corporate leaders for adhering to standards that were set in place years before their time, and subsequently punish their companies for their actions. Unfair and very risky. It can be argued that the corporate executives like Lee Jae-yong under the gun now were essentially trapped in a long-standing system that put them in a no-win situation.

Putting harsh controls on chaebols could impede their ability to hold up South Korea's standard in the world of international business. Other companies, some of them directly backed by their home governments, would welcome the opportunity to steal market share from Samsung and the other chaebols.

Samsung's dominance in semiconductors — a key pillar of Korea's export-based economy — is particularly vulnerable.  That would not only be bad for those big South Korean businesses and the roughly 1 million workers they employ, but for the entire national economy and government revenue stream as well.

Obviously, there is a need for change and smart reforms to begin to untangle government from the private sector. But Korean lawmakers have to make sure that any changes they approve don't do unintended harm.

Punitive policies imposed on companies like Samsung could slow innovation and investment, tilting the playing field in favor of non-Korean companies. With Korea still in a state of economic and political tumult, heavy-handed policies from the new administration that create even more uncertainty could easily backfire, making a difficult situation worse at a time when economic vitality is critical to demonstrating a strong and united front.

Well-thought-out, deliberative adjustments in the way chaebols conduct their affairs is the safest way to advance the rule of law while still safeguarding Korea's long-term economic well-being.

In fact, South Korea should pursue aggressive growth policies such as adopting a Hong Kong/Singapore-like tax system. To encourage new startups that might reduce in the future the relative importance of the chaebols, the country should eliminate capital-gains taxes on equity securities. This positive approach would avoid unintended disruption while strengthening the country's already impressive economy.

http://www.investors.com/politics/commentary/too-much-change-too-fast-could-hurt-south-koreas-economy/

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