Beyond Steel: The New Korean Economy in the Age of

 

Computer Telephony Integration

    

By Leonard A. Phillips 
Copyright © 2000. All rights reserved. 

The Republic of Korea [1] is working itself out of its worst depression in the post-Korean War years by revising economic policy to encourage foreign direct investment. The introduction of advanced speech and language technologies will strengthen Korea’s leadership in the convergence of telephony, computer, and Internet technologies in Asia.

 

Foundation for growth: The New Korean economy

Overview of the economic crisis

During 1997, Korea—the world’s eleventh largest economy—was drawn into the financial market turmoil then raging in Southeast Asia. From the depths of a recession unprecedented since the end of the Korean War, Korea created and implemented new economic policies to launch its recovery and establish the basis for continued growth and prosperity.

Korea’s remarkable macroeconomic growth during the 1990s had masked a weak financial sector and an overleveraged corporate sector. [2] These weaknesses contributed to a sharp buildup of short-term external debt (estimated by the IMF in excess of $100 billion by mid-1997) that left the economy vulnerable to external shocks and adverse shifts in investor sentiment. In the ensuing financial crisis, the country suffered massive capital outflows, depreciation of the Korean won, and a general collapse of confidence and private sector demand. The nation’s credit rating was downgraded, and external financing dried up, following the bankruptcies of several large, but credit-ridden companies early in the year. The value of the won plunged from about 800 Korean won to the U.S. dollar in 1996 to a nadir of about 1800 won to the U.S. dollar at the end of 1997. With external reserves nearly exhausted by November 1997, Korea was at the brink of default. “The economic crisis halted production lines of the largest corporations, their suppliers, and other entrepreneurs.” [3]

Launching the solution

To resolve the economic crisis, Korea needed to restore confidence and stabilize financial markets quickly, while also laying a foundation on which to build a sustained recovery. The new Korean economy had to attract foreign capital, support infrastructural and technological modernization and growth, and ultimately face the challenge and promise of reunification with North Korea. The government fashioned a Tripartite Accord among labor, business, and the government to establish an agenda for consensus.

The solution was a combination of macroeconomic policies and structural reforms, supported by the largest financing package in International Monetary Fund (IMF) history. Key initial steps included the following:

·     On December 4, 1997, Korea agreed to a total financial package of $58 billion, including a $21 billion stand-by arrangement with the IMF, support from the World Bank and the Asian Development Bank, and a “second line of defense” pledge from bilateral donors.[4]

·     Restrictions were eased on investments in Korean equities and on direct corporate borrowing abroad to capture badly needed foreign capital and reduce the excessive amount of short-term debt.

·     Korea reached agreement with foreign banks in late 1997 to extend the maturity of short-term claims on its banks to avoid a default on external obligations.

·     Restrictions were eased on foreign ownership of corporations in nonstrategic sectors both to attract foreign direct investment (FDI) and impose the weight of market discipline on Korean businesses.

·     On March 30, 1998, the new Kim Dae-Jung Administration announced its plans to reform Korea’s FDI and foreign exchange and capital transaction systems. A temporary hike in interest rates was imposed with the goal of stabilizing the won and avoiding a depreciation-inflation spiral. By July 1998, the won had stabilized at about 1200 won to the U.S. dollar, and continues to strengthen.

·     The unemployment insurance system was expanded and direct support to workers was provided through public works programs, temporary livelihood protection, and other social programs.

On November 14, 1998, the Foreign Direct Investment Promotion Act, following National Assembly approval, was promulgated. Its provisions enhance local support for foreign investment, encourage development of industrial zones, allow relief on taxation and other aspects of support for foreign investors, particularly for businesses: “...featuring significant development support for other industries, such as manufacturing industries generating high-added value, considered necessary to promote the international competitiveness of the said domestic industries,” and “…businesses with accompanying highly advanced technologies…which have not been developed, or are of low development levels, in the nation, considered necessary to promote the international competitiveness of domestic industries.” [5]

·  FDI policies were restructured to make it easier to invest in Korea. Investment-related laws that were regulatory and administrative were revised to promote and support FDI. In a symbolic administrative change, the Act renamed the former “Korea Investment Service Center” the “Korea Investment Support Center.”

·  Local governments were charged with establishing supportive investment environments within their jurisdictions.

·  The term for reductions or exemptions for corporate and income taxes was expanded from 8 to 10 years.

·  Incentives for obtaining and developing industrial sites on national and local government properties were instituted. For example, the lease period for government properties was expanded from 20 years to 50 years with continuous renewal, up to 50 years at a time, now possible. Rent reduction or exemption is available for national government properties in Foreign Investor Industrial Parks, National Industrial Parks, and Foreign Investment Zones (FIZs). Reductions on local government properties will vary between 50% and 100%, as determined by the host local governments. National funding will be made available to support the creation of local FIZs, and FIZ developers will receive not only construction costs, but also infrastructure facility construction support.

·  An Automatic Authorization System will be introduced, under which approval of an application for approval or authorization related to FDI will be automatically granted if there is no response to the application within the time period specified by law.

·  The Ministry of Finance and Economy no longer needs to be notified within one month of customs clearance of induced foreign capital.

·  Non-residents no longer must appoint a resident as an agent to submit notifications, applications, or reports regarding FDI-related transactions.

·  Restrictions on FDI can only be applied in areas affecting national security, public order, public health, environmental preservation, and social morals.

·  The foreign-invested company registration system will be maintained and used to illustrate tax reduction or exemption incentives and other supports to prospective foreign investors.

The success of the reforms

During 1998, the results of these and other sweeping policy changes were realized in terms of FDI growth, interest rate stabilization, increased GDP, and the reduction of inflation. From a low of $130 million in January 1998, by December total FDI grew 13-fold to $1.943 billion to an annual total of $8.8 billion. In 1999 FDI nearly doubled to $15.5 billion. Interest rates, which had risen to over 30% at the beginning of 1998, fell to less than 5% in 1999. GDP increased almost 11 per cent for the year in 1999, despite the impact caused by the collapse at mid-year of Daewoo, the second-largest chaebol, and continues to expand into 2000. During 1999, the consumer price index increased only 0.8%, a record low. During the first four months of 2000, it increased to 1½%, although core inflation (excluding energy and most agricultural products) remained less than 1%. [6]

Foreign direct investment in Korea (in millions of dollars) [7]

1993	1994	1995	1996	1997	1998	1999
1,044	1,317	1,941	3,203	6,971	8,852	15,500

 

In July 2000, the IMF raised its growth forecast for Korean GDP to between 8 percent and 8.5 percent from the 7 percent it predicted earlier. The IMF also said consumer prices will probably rise less than 2.5 percent this year, lowering its earlier 3 percent inflation forecast. The seasonally adjusted jobless rate fell to 3.8 percent from 3.9 percent in May, according to the National Statistical Office. Real GDP has rebounded dramatically. The commitment to reform is making Korea a more open, competitive, and market-driven economy.

To maintain long-term growth, the IMF calls for further reforms in the lending practices of banks, the privatization of nationalized banks, and the divestiture of government holdings in recently acquired, troubled banks. In addition, the IMF recommends that corporations focus on growth and profitability through strategic alliances as well as improved housekeeping in terms of cost cutting and the sale of non-core assets.

The challenge and opportunity of reunification

The reunification process was launched during the summit meeting of Kim Jong Il, National Defense Committee Chairman of North Korea, and Kim Dae Jung, President of the Republic of Korea last June. The symbolic apogee of the agenda was the proposal that the peninsula of the two Koreas be linked by joining two railroads, one in North Korea and the other in South Korea, that currently terminate 10 miles apart at the demilitarized zone. However, extending train tracks is old technology; getting North Korean workers on track in the new economy of South Korea will require well-funded training in modern technology and communications job skills, a robust social support system, and patience.

Raw demographics fail to reveal the dimension of the challenge of integrating the populations and the economies of the two Koreas. The population of North Korea is 21.4 million, of whom about 70%, or 14.9 million, are 18 years old or more. South Korea is about twice as large with a population of 46.9 million, of whom 73% or 34.2 million are 18 or older. [8] But anecdotal reports from North Korean defectors and recently reunited families indicate that lifestyles in the two Koreas are very different.

About 900 North Korean defectors have entered South Korea over the past 20 years. Experience with even this limited number had strongly suggested that major training and social support programs are critical to successful adaptation to life in South Korea. For example, in contrast to South Korea’s state-of-the-art communications infrastructure, “North Korea’s communications system has not been upgraded since the 1950s and its people have virtually no access even to rotary dial telephones,” according to The New York Times. [9] Many North Koreans, “…have never seen a modern household appliance. Using a washing machine, remote-control television, or automated teller machine is baffling.” As a first step, the Ministry of Labor plans to establish 46 government employment centers across South Korea to provide training, counseling, and job placement for defectors, and is subsidizing companies that hire defectors with half of their monthly salary up to $700. [10]

Such government programs are costly, and North Korea is unable to make any substantial contribution to their budget. Indeed, North Korea is in “dire financial straits,” according to The New York Times. [11] The potential overall costs to South Korea in unifying with the North are estimated at between several hundred billion dollars and a few trillion, depending on how the costs are calculated. Absorption of the North by the South would severely impact South Korea’s fast-growing economy. The assessment of Park Jie Won, Minister of Culture and Tourism, is that rapid reunification “would pose a far heavier financial burden than the one West Germany bore from its union with East Germany in 1990.” [12] The question is whether the Foreign Direct Investment Promotion Act can provide the seed capital to continue growing the economy of South Korea, while also simultaneously spinning off the funds needed to support training and social support for the North Korean population in a reasonable time frame.

The role of Korea in the Asian PC and telecommunications boom

An all-time high in PC sales

PC sales in East Asia and the Pacific peaked last year, reaching an all-time high in 1999. Excluding Japan, total PC sales in this growing market were approximately 14.1 million units in 1999, according to International Data Corporation (IDC) Asia-Pacific, a consulting group based in Framingham, Massachusetts, U.S.A., up from 10.5 million units in 1998. IDC estimated world PC sales in 1998 at 112.7 million units. South Korea was the second-largest player in this PC market. According to the Ministry of Information and Communication (MIC), PC sales in Korea totaled 2.19 million units in 1999, and exhibited a remarkable growth of 79.2% over 1998. In comparison, PC sales in China grew at a more modest rate of 25.6% to about 4.9 million units in 1999.

On April 11, 1999, the MIC confirmed its Basic Plan on Software Industrial Support in Korea, and increased the Information Technology budget by 27% over last year to about $84 million (93.94 billion won). These funds will be applied to fostering software-related startup companies, financing R&D, and supporting oversea projects.

Telecommunications growth in Korea during the late 1990s

Telecommunications services, telecommunications manufacturing, and software in the Republic of Korea has grown steadily during the last half of the 1990s, despite the Asian economic crisis. The MIC anticipates that the growth rate in this sector will rise to as high as 16% during the period from 2000 to 2002, as summarized in the following table.

Recent growth in the Korean telecommunications industry (trillions of won)

Sector	1995	1996	1997	1998	1999	2000 (est.)	2001 (est.)	2002 (est.)	Est. Annual Growth Rate 1998-2002
Telecommunications Services	11.2	14.8	17.2	16.9	20.7	22.4	25.0	27.7	13.0%
Telecommunications Manufacturing	38.6	42.0	55.0	65.7	68.5	72.9	82.3	93.1	9.1%
Software	1.7	2.7	5.3	5.6	5.1	6.7	9.9	15.5	28.9%
Totals	51.5	59.4	77.5	88.3	94.3	101.9	117.3	136.2	11.5%

 

Korea connects with the Internet

Internet use in South Korea is growing at a phenomenal rate. The number of users increased nearly five-fold from 3.4 million in February 1999, to 15.34 in July 2000. Users are more likely to be younger, and the demographics—there are approximately 11.7 million students in a total population of 46.4 million—suggest the basis for continued growth in Internet use. I-Click, an Internet tracking firm, estimates that 10.5 million users over the age of 13 years have used the Internet. A government-commissioned survey conducted by Research & Research puts the figure at 10 million users over the age of 7 at the end of 1999. The MIC estimates that one out of four Koreans now use the Internet at least occasionally (July 2000). [13] Increased Internet use parallels the dramatic growth in PC ownership that has occurred since the government began providing low-priced PCs to the public late 1999. [14]

Worldwide Internet use by region in 1999

Region	Users (millions)
North America	108.9
Western Europe	57.9
Asia-Pacific	47.8
Latin America	9.3
Eastern Europe	5.8
Africa	1.5
Middle East	1.4
Global Total	232.6

          Source: Jupiter Communications, 2000

Electronic commerce

In e-commerce volume, Korea is second only to Japan in East Asia-Pacific. For example, the growth of online banking, which began operations across the country in July 1999, has been especially rapid. By August 1999, online securities transactions alone had generated $47.17 billion in revenues, or 29% of Korea’s total stock transactions, valued at $162.2 billion. [15]

In 1999, online retail transactions in Korea totaled $720 million, based on data from a survey of 2,500 e-commerce companies by the Korea Information Society Development Institute (KISDI). Book purchases, perhaps ironically, took the largest share at 29.3 %, followed by computers and peripheral devices at 21.6%; and electronic products at 17%. [16] According to eMarketer™ total retail e-commerce volume was only $351.4 million, up about four-fold from $88 million in 1998. [17] Despite the variance in their estimates of 1999 e-commerce totals, both KISDI and eMarketer™ forecast Korean e-commerce sales to reach and surpass $1 billion in 2000. [18] ^{, [19]}

About 90% of all retail e-commerce activity is concentrated among seven major sites, but the number of customers is growing rapidly. E-commerce is still a risky business for would-be e-tailers in Korea, as only 3.8 percent of e-shopping malls broke even or turned a profit last year, indicating the vast majority are suffering losses. The number of e-commerce purchases increased to 2.15 million (up from 910,000 through November 1999) by the end of May 2000. About 7.7 percent of the population between the ages of 13 and 49 bought online. About 87% of South Korean Internet users have visited Internet shopping malls, with 52% of those completing purchases. Compare the U.S., where about 58% of Internet users have made a purchase. [20] Regionally, Japan has the largest online retail revenues, at $1.5 billion; Australia generated $380 million. Together, Korea, Japan, and Australia account for 94 percent of the total regional e-commerce market. [21]

In 1999, Korean business-to-business (B2B) e-commerce generated $8.85 billion, and is forecast to grow 78 percent to $15.7 billion this year according to KISDI. The revenue numbers warrant further scrutiny, as only 4.6 percent of the 1999 total was "real" e-commerce through Web sites and 95.4 percent was trade through electronic document interchange (EDI). By industry, appliances and electronics accounted for 79.6 percent of all B2B e-commerce, and metal and machinery 20.1 percent. The share of e-commerce in all B2B trade is projected to increase from 1.17 percent in 1999 to 1.83 percent this year. [22]

Wireless telephony

Wireless telephony usage has increased dramatically in Korea during the latter half of the 1990s, since the infrastructural costs are lower and time-to-market is faster than installing landlines. According to the MIC, the number of subscribers to PCS wireless telecommunications services reached 7.6 million only 1-1/2 years after its launch. The number of mobile phone users in Korea rose to over 27 million in July 2000, and more Koreans now use mobile phones than traditional fixed phones. [23]

Overall, wired telephony generated revenues of $5.7 million (6.3 billion won) in 1995 and grew to $6.3 million (7.0 billion won) in 1998. In contrast, wireless telephony, including mobile and paging services, generated 3,418 billion won in 1995, and grew four-fold to 12,115 billion won in 1998. FDI in the telecommunications sector burgeoned from $64 million in 1996 two orders of magnitude to $2.0 billion in 1998 as direct evidence of the success of the government’s new FDI incentives. [24]

Garlic, mobile phones, and polyethylene

Korean competitiveness in Asian wireless telephony exports led to a recent development involving China earlier this year. In a perhaps more symbolic than substantive standoff, South Korea increased the duty on garlic imports from China from 30% to 315% earlier this year; the increase was scheduled to begin June 1, 2000 and grew, said Seoul, from the need to protect Korean farmers. [25] The scheduled increase was evidence of the world-class status of Korea in the international trade, and involved far more than garlic. The Korean move was timely because China was scheduled to imminently decide whether to impose full import duties on imported Korean steel and to take anti-dumping action to discourage the import of Korean polyethylene terephthalate film, a plastics feedstock. China's immediate reaction to the increased garlic duty was to ban imports of South Korean mobile phones and polyethylene. But behind the curtain, the numbers involved suggest that more than raw economics was involved. Korean garlic imports from China in 1999 totaled $9 million (5.9 million pounds), while mobile phones generated $51.4 million and polyethylene exports, $471.3 million. Korea's preemptive strike against Chinese palates did not appear to be part of a rational economic recipe. Rather, it suggested that Korea had attained full status as a trading partner with China and was playing a negotiating card with significant symbolic, if not monetary, value.

The automotive market as a telecommunications customer

In addition, the automobile market is a growing factor in telecommunications and in on-board computer-based services, such as automobile navigation systems, speech-driven operations, and mobile telephones with Internet access. The number of vehicles registered in South Korea grew from 9.5 million units in 1996 to 11.1 million in 1999. Of these, 2.8 million were manufactured in Korea in 1996, 2.8 million in 1997, 1.9 million in 1998, and 2.8 million in 1999. [26]  

Other markets

Wireless Portal Service demand is growing along with the increasing numbers of wireless telephone users. The traditional telephone call center is being displaced with Web call centers, reflecting a change in lifestyle based on increased dependence on the Internet. The biometric security market is growing in response to the need to protect information and privacy. Demand is growing for sophisticated computer functionality in toys, which talk, move, and query and respond to their owners.

CONCLUSION

The convergence of economic, technological, and market developments have established a positive climate for a more fully developed relationships between Korea and other nations, primarily first-world members. In the nurturing environment of government reforms that encouraged FDI, numerous strategic siting decisions were made or initiated in world-class companies. The welcoming business climate in Korea and the need for multinational companies to decrease overhead costs while assuring high quality products suggest a continued period of strong capital growth within Korea in the coming years.