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Business Roundtable
with
Thomas Byrne
Vice President and Senior Credit Officer, Moody's Sovereign Risk Group
Thursday, May 31, 2007
South Korea’s economic policy is reaching out in two directions, cementing a free trade agreement (FTA) with the United States and jointly developing the Kaesong Industrial Zone with North Korea. Ostensibly, both initiatives aim to boost national GDP. However, according to Thomas Byrne, vice president and senior credit officer of Moody’s sovereign risk group, only one of these two engagements is practical.
South Korea’s drive to reach an FTA with the United States is a straightforward measure likely to yield great benefits for both countries, Byrne said. Numerous studies have predicted that once ratified, the FTA will be an important shot in the arm for Korea’s exporters and overall economy. Success with a U.S. FTA will also pave the way for an equally beneficial FTA with the European Union.
The economic rationale for developing the Kaesong Industrial Zone, which allows small- to medium-sized South Korean manufacturing companies (SMEs) to utilize low-priced North Korean labor, is to increase competitiveness in the SME sector. Currently, 10,000 to 12,000 North Korean workers are employed by South Korean companies at Kaesong. The zone would have to reach its projection of employing 350,000 North Korean workers, however, for it to have an appreciable impact on the South Korean economy. That, said Byrne, is unlikely to happen as long as North Korea and its neighbors remain at an impasse over its nuclear program.
More important than its economic rationale, he continued, are Kaesong’s political goals. South Korea’s leaders initiated the project with the hope that it might eventually spur the DPRK to adopt economic reforms just as China and Vietnam relied on special economic zones (SEZs) to spur wider liberalization in the 1980s. If the DPRK did reform, and enjoyed healthy economic growth as a result, South Koreans wouldn’t be stuck with as great a financial burden of raising North Korean living standards during an eventual reunification process.
So far, Kaesong’s policy architects haven’t articulated a plan of how the project will spur economic reform nor created benchmarks for its political success. There are also important differences between Kaesong and the Chinese and Vietnamese precedents. In those cases, the SEZs were meant to foster the development of local companies which had backward linkages to the larger national economy. Kaesong operates as a special preserve for South Korean companies, walled off from the rest of the North Korean economy. Furthermore, it’s unlikely that Kaesong will create a new class of capitalist-oriented North Korean managers, accountants and professionals who could serve as agents of reform. Because of Kaesong’s proximity to their home offices, South Korean companies operating there have no need to provide North Koreans with any training for higher positions.
Byrne closed his remarks with the caveat that Kaseong could indeed achieve its political goals if North Korea’s leadership made the decision to reform. At this point, he believes it hasn’t. And in comparison to its economic engagement with the U.S., South Korea’s goals at Kaesong remain elusive and quixotic.
About the speaker
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 with
Wendy Cutler
Assistant U.S. Trade Representative for Japan, Korea and APEC Affairs
Wednesday, April 25, 2007
The recently concluded U.S.–Korea free trade agreement (FTA) is the largest FTA the U.S. has negotiated since NAFTA and the largest ever negotiated by Korea. As high as the stakes are for the two parties, the deal will also have a major, if less direct, impact on Japanese business and politics. The Korea Society and the Japan Society co-sponsored a business forum with Wendy Cutler, assistant U.S. trade representative for Japan, Korea and APEC affairs, to assess just what the impact will be.
Cutler, who led the U.S. negotiating team at the 10-month long FTA talks with Korea, believes that the deal is “truly a groundbreaking and historic agreement.” Though its full details won’t be made public until the deal is submitted to Congress, Cutler said that it will cut 95% of bilateral duties. It calls for the elimination of all tariffs on 94% of trade in manufactured goods, opens each country’s service sector and reduces a range of non-tariff trade barriers. Neither side got all of the concessions they wanted from the other, Cutler added, but on balance it’s a strong deal for South Korea—which expects to reap a 12% increase in exports to the U.S. from the deal—and the U.S., which will gain a solid foothold in East Asia’s booming economy.
Reaction to the deal in Japan has been mixed. Tokyo’s own negotiations for an FTA with Korea collapsed in 2004, so many were surprised that the U.S. and Korea were able to reach a deal at all. Some in Japan worry that if ratified, the deal would put the country at a competitive disadvantage vis-à-vis Korea. Cheaper U.S. and Korean goods may displace Japanese exports in both markets, and as Korea becomes more attractive to U.S. foreign direct investment, it may do so at Japan’s expense. Japanese free-trade advocates may be heartened by the deal, which could spur their government to pursue trade liberalization more seriously.
Asked about prospects for a U.S.–Japan FTA, Cutler said such an agreement isn’t realistic in the near term. The U.S.–Korea FTA talks succeeded, she said, because Korea’s leaders were united in their assessment that the country needed to conclude the deal, they were willing to put sensitive economic sectors up for negotiation and maintained a top-level political commitment to the process throughout. Such conditions, she believes, aren’t yet in place in Japan.
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 Young Professional Forum
Investing in Korea
Panel Discussion and Networking Session
with
Donald Hanna
Global Head of Emerging Markets, Citigroup
John Lee
Director, Lazard Asset Management
Eric Yoon
Partner, White & Case Law Firm
Kaz Parsch
Senior Manager of International Tax Services, Ernst & Young
Wednesday, March 8, 2007
Smaller and less well-covered than neighboring Chinese and Japanese markets, Korea presents a certain challenge for American investors looking for opportunities. Four of New York’s top investment professionals helped to fill in the gaps, presenting a detailed map of Korea’s economy to an overflow crowd of young professionals. The forum was co-presented by Columbia Business School Asian Alumni Club of New York and sponsored by Merrill Lynch, Korean Business Association of Columbia Business School and Tiger Asia Management, L.L.C.
“Korea is growing at cruising speed,” said Donald Hanna, global head of emerging markets at Citigroup, adding that Korea’s macroeconomic situation is solid. Korea is known as an export powerhouse, but Hanna said that in recent years, the domestic consumption has been rapidly expanding as well. Housing prices in Seoul have increased dramatically in 2006 and 2007 and the central bank is getting jittery about an asset bubble. This boom, however, is more a side-effect of success rather than a genuine trouble spot. There isn’t as much housing in Seoul as consumers want, Hanna said, as the city becomes wealthier, potential buyers are bidding up prices.
The securities market in Korea has become more complicated as well, added John Lee, director of Lazard Asset Management. But the complexity offers greater opportunity, he continued. When asked about Korean securities in the past, “I used to just say ‘buy Samsung’” said Lee. Now there are numerous, smaller companies which provide great value. And, unlike in many East Asian countries where excellence is highly concentrated by sector, Korea has great companies across the economic spectrum.
Eric Yoon, a partner at White & Case law firm, noted a point of concern that others shared: the possibility of a nationalist backlash against foreign investment in Korea. Korea has been a leader in globalization, and benefited tremendously, especially after opening its markets to foreign capital in the wake of the IMF crisis. However, beginning with the KEB–Lone Star investigation, a series of high profile cases in which foreign investors were seen to take huge profits from Korea stirred nationalist resentment. Calls for government action against foreign capital have grown. In response, the government has begun tightening restrictions on tax shelters frequently used by foreign businesses and many fear more action might be in the offing.
Kaz Parsch, senior manager of international tax services at Ernst & Young, closed the program with a more detailed discussion of Korea’s tax regime.
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 with
Chey Tae Won
Chairman, SK Corporation
Wednesday, February 28, 2007
The SK corporation is one of South Korea’s most successful conglomerates, and an emblem of the country’s rapid economic development. Just a few decades ago it was a small textile concern in rural South Korea. Now it generates U.S. $70 billion in annual revenues worldwide from ventures as diverse as energy and telecom, and is 112 on the Fortune 500 list. Still, when SK’s chairman Chey Tae Won assumed leadership in 1998, the company was in trouble and major reforms were needed.
Speaking at a CEO Luncheon program at The Four Seasons hotel in New York, chairman Chey explained SK’s organizational challenges and the plan he implemented to overcome them. In 1998, South Korea’s economy was still reeling from the IMF crisis. Beneath such immediate problems as liquidity and debt issues however, Chey discerned a deeper crisis at SK. For a generation, Korean business had imbued its managers with a strict sense of hierarchy and vested all corporate power and initiative with the chairman. Amidst the crisis, corporate officials were paralyzed, unable to respond for themselves to emerging issues.
Chey saw that to change this pervasive culture he would have to start at the top. He began by reforming SK’s board of directors. In the process, 70% of the new board he appointed was drawn from outside the company, so as to bring in new ideas. Chey then mandated 100% attendance at meetings from his board. Most importantly, he stressed to each member that from that point on, they would be responsible for developing their own strategies as opposed to waiting for direction from above.
Resistance to Chey’s reforms was initially high. However, it abated as the reforms gained traction and the company became more nimble. Now Chey is in the process of implementing similar reforms on the boards of SK’s dozens of affiliate companies.
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