South Korea, long in Japan's shadow, is blazing a new trail for Asian economic development. \nBy encouraging consumers to spend freely on credit, throwing its doors open to foreign investment, and introducing an American-style freedom to fail, South Korea has put itself back on track as one of Asia's fastest-growing and most diversified economies. \nAnd while Japan's stagnation draws attention, South Korea's boom draws investors. \nWith Seoul's main stock market index nearly doubling since September, foreigners now account for 38 percent of ownership and two-thirds of daily trades. Since 1998, South Korea has attracted US$52 billion in new investment from overseas, more than double what it pulled in during the previous four decades. \nSeveral high-profile foreign takeover failures have given South Korea the image of a country that takes one step backward for every two steps forward. General Motors recently announced a US$400 million deal to take over three auto plants from Daewoo Motor, and Lehman Brothers signed a tentative deal to invest US$1 billion in Woori Finance Holding. At the same time, Micron Technology withdrew a US$3 billion bid to take over much of Hynix Semiconductor after the Hynix board vetoed the deal. \nBut international rating agencies praise South Korea for bouncing back from a financial crisis five years ago, paying back a US$20 billion loan from the IMF in August and stacking up US$108 billion in foreign currency reserves. \nNext year, in fact, South Korea could enjoy higher credit ratings than its historic economic tutor, Japan. \n"During the last four years, we have been dismantling the Japanese system," Han Duk-soo, economic adviser to President Kim Dae-jung, said in an interview. "Koreans are not like the Japanese. We are now more like the Americans." \nFor most of the first half of the 20th century, Korea was a Japanese colony. For most of the second half, it was in economic awe of Japan. Now, as Japan struggles to make Japan Inc viable, South Korea is dismantling Korea Inc. \nOnly five years ago, South Korea's foreign exchange reserves were disappearing like quicksand, and middle-class women were donating their gold jewelry in a national campaign to save the country from bankruptcy. The Japanese, meanwhile, are settling for a slow decline. \n"Unlike Korea, the problem here has not really scared a lot of people," Gerald Curtis, an American political scientist with 37 years experience in Japan, said in Tokyo. "The Japanese public is nervous, but they are not really scared, not really mad." \nHank Morris, an investment adviser with a similar number of years in Seoul, said South Koreans did not have the luxury of delaying reform. "They had to bite the bullet," he said, "take the medicine." \nWith a US$10,000 per capita income -- a third of Japan's -- South Koreans see themselves as still striving for the brass ring of development. \n"Japan is handcuffed by their perpetual search for consensus, the Koreans could not care less for consensus," Donald Gregg, chairman of the Korea Society, said from New York. With years of experience in both countries, he concluded: "In Korea, if something isn't working, they move it, they break it, whatever. The Japanese go along in the hope that tweaking it will make it change." \nIn Japan, bankrupt companies and banks often receive generous bailouts, on the argument that they are "too big to fail." In South Korea, since 1997, about half of the 30 "chaebol," or family-owned conglomerates, have been allowed to fail, to be restructured or to change ownership. \n"Korea has been more active than Japan in allowing companies to go bankrupt," said Jwa Sung-hee, president of the Korea Economic Research Institute, a business think tank here. \nIn a measure of Korea's economic dynamism, a study released in April of the top 30 exporting companies of 1980 found that only a quarter remained on the list in 2001. Some missing companies had gone bankrupt, but most, like textile makers, had been replaced by companies in more advanced industries, like electronics, cars and ships. \nThe payoff is clear: While Japan's economy, the world's second largest, is expected to contract this year, for the second year in a row, economic growth in South Korea is expected to hit 6 percent, twice last year's rate. \nWhile the board of Hynix, responsible for 3 percent of South Korea's exports, may refuse a buyout, the government appears determined. With state banks holding US$2.3 billion in Hynix debt, South Korean officials have made clear that even with 15,000 jobs at stake, they are stopping new government loans and will move to sell the company to the highest bidder, probably a foreign company. \nAt the end of May, the eyes of the world will swivel to South Korea and Japan, co-hosts of the World Cup soccer championship. Even without this, South Korea is increasingly recognized as a world economic player. \n"Korea is approaching the home stretch: one more doubling of economic size and Korea will truly be a fully developed country," James Rooney, a vice chairman of Deloitte Consulting Korea, wrote recently in The Korea Times. "Somewhere over the next 10 to 15 years it will have a population of 53 million people and GDP per capita of around US$20,000." \nIn mid-April, shortly after Hyundai Motor announced its goal of becoming one of the world's top five automakers by 2010, it broke ground on a US$1 billion plant in Alabama. Samsung Electronics, Korea's largest company, has reported record profits this quarter and now seems poised to surpass its Japanese rival, Sony, in market value. \nSouth Korea has injected about US$120 billion into troubled banks, but also forced big changes. South Korea's bad bank loans have been reduced to an internationally acceptable level of 3.4 percent, from around 10 percent three years ago, the level where Japan is stuck today. \nThe changes meant closing 16 banks and a quarter of bank branches, and firing 300,000 employees. In a sign of a moderating union militance, the layoffs were met with walkouts, but no strikes. Some seized new career opportunities, starting some of the 9,000 businesses that opened in South Korea over the last five years. \nAbout 4,000 former bank officials are under investigation for possible financial wrongdoing. As younger, American-trained bankers take over top jobs, government influence in lending decisions has been cut. \n"If you compare Korea pre-crisis and Korea post-crisis, now bankers talk about shareholder value," said Jae Woo-lee, managing director of a Lehman Brothers Korea office that opened here in April. "Before it was, What does the chairman like? Cars? Ships? Now it is, What will the shareholders like?" \nSouth Korea's banks turned US$31 billion in losses in 2000 to US$38 billion in profits last year. With the stock market soaring, officials hope to sell, over the next year, stakes in four banks and a life insurer that were taken over by the government during the financial crisis. \nAbandoning self-sacrifice for the greater glory of the nation's trade surplus, Koreans snapped up millions of credit cards in recent years. Household indebtedness has jumped by 50 percent in four years. \nSouth Koreans flocked to shopping districts last year, increasing retail sales by 11 percent. Last year, the average price of a Seoul condominium jumped by a third. In this year's first quarter, car sales jumped by a third. \nAs Korea increasingly looks west, to the economic transformation of China, attitudes about foreign investment are changing. Kim has lifted foreign investment limits in banking, real estate and stocks. Most foreign exchange controls are to be lifted later this year.
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