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Friday, June 06, 2003

On the Chaebol Culture in S Korea

S Korea is another of the little known demographic 'bombs' waiting to go off. The most staggering part is the enormous drop in the projected dependency ratio. Why economists have never focused before on dependency ratios is a mystery to me. What I need is a domgrapher from 'out there' to help understand the population momentum equations, why there is so much vulnerability in certain countries, and what this is likely to mean for, say, India and Brazil? We can see three clear groups: W Europe, US, Canada, Australia, Japan, Hong Kong, Singapore - the so called Eastern 'transition countries' - and now the 'newly developing countries. In each case the process is slightly different. China may be an 'outlier' due to the one child policy.

The total fertility rate in the Republic of Korea increased from 5.40 births per woman in 1950-1955 to 6.33 births in 1955-1960, because of the baby boom that followed immediately after the Korean War. However, the total fertility of the country showed a sharp decline thereafter, down to 4.28 births in 1970-1975, to 2.50 births in 1980-1985 and to 1.70 births in 1990-1995. Due to significant declines of mortality over time, life expectancy at birth, for both sexes combined, increased from 47.5 years in 1950- 1955 to 70.9 years in 1990-1995. The proportion of the elderly (aged 65 or older) in the total population remained between 3.0 and 4.0 per cent between 1950 and 1980, and started increasing slowly thereafter, to 5.6 per cent by 1995. The potential support ratio of the country dropped from 18.4 to 12.6 between 1950 and 1995.

Historically, the Republic of Korea has been until recently a country of emigration. The medium variant of the United Nations 1998 Revision assumes a net total of 450,000 emigrants from the country between 1995 and 2020 and none thereafter. Thus, it is projected that the population of the country would increase from 44.9 million in 1995 to 53.0 million in 2035, and then decline to 51.3 million 2050 (The results of the 1998 United Nations projections are shown in the annex tables.) The working-age population of the country is projected to increase from 31.9 million in 1995 to 36.3 million in 2020, and then decrease to 30.4 million by 2050. The population aged 65 or older would continue to increase rapidly between 1995 and 2050, from 2.5 million to 12.7 million. As a result of these changes, the potential support ratio in the country would drop extremely rapidly, passing from 12.6 in 1995 to 5.7 in 2020 andto 2.4 in 2050.
Source: UN Report on Replacement Migration

Meanwhile Andy Xie draws attention to another dimension of S Korea's problem, the Chaebol culture:

The government hasn’t completed its structural reforms, and the country’s value-destroying chaebol culture makes the economy even more vulnerable. We believe the country’s current economic difficulties largely result from its bad business culture. The key barrier to a thorough reform, in our view, is economic nationalism. We believe families of value-destroying chaebols hide behind nationalism to assert their control over businesses they can’t run properly............

The chaebol business culture is the culprit, in our view. The business groups are run like ancient tribes to maximize political power for the leading families rather than as normal businesses to maximize profits. Market share and asset size are far more important than profits because size allows them to gain under-priced credits.

The control structure of the groups is tribal. Leading families control the business groups for no legitimate reason. In contrast, Hong Kong’s families at least control their businesses through majority shareholdings. Even though the chaebols’ controlling families do not own majority stakes, Korean culture allows them to control their businesses out of respect for their long associations with such businesses. In this legacy of feudal culture, they are powerful for being who they are. How did Korea become a developed country with such a terrible business culture?

International investors though Korea changed in 1999 and poured money into the market. Sadly, they were proved wrong again. The SK Global scandal reminds how little accountability Korea’s businesses have toward their shareholders. The corporate shareholders of bankrupt credit companies are bailing them out with their shareholders’ monies without consulting them. Foreign investors currently own one-third of the Korean stock market and majority stakes in several leading companies. Whenever foreign investors have a dispute with corporate management backed up by the chaebol families, they always lose.

Foreign investors have consistently lost money in Korea. Why should they continue to invest in Korea? They appear to hope that Korea will eventually reform to reward their patience. Their patience, however, does have a limit. If Korea doesn’t reform its corporate governance to connect corporate control with real stock ownership, foreign investors will eventually leave.
Source: Morgan Stanley Global Economic Forum

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