The Korea Times Articles - 2001

Is Korea Ready for Kim Woo-choong's Return?

By Prof. Chang Se-moon
University of South Alabama

MOBILE, Alabama _ Recent reports indicate that Kim Woo-choong, the fugitive former chairman of the Daewoo group, plans to return to Korea as soon as the trial of former and current Daewoo executives is completed. All 34 Daewoo defendants have already been found guilty and received punishment, with some having been sentenced to as long as seven years in prison.

As everyone knows by now, Chairman Kim is accused of inflating the conglomerate's assets by $34 billion between 1997 and 1999, and obtaining about $8 billion in loans from local financial institutions based on the inflated figures. Kim is also suspected of having illegally diverted about $20 billion in company funds overseas and using nearly half of the money as slush funds to bribe influential politicians and government officials in Korea.

Kim left for China in October 1999 and is now in hiding. Places rumored for his hiding range widely from Sudan to Morocco, Germany, Singapore, Hong Kong, France, United States, and even North Korea. Records were claimed to exist for entries to some of these countries, but no records of departure were found, leading to the speculation that Kim may possess several fake passports. Interpol believes that Kim is currently staying in the United States.

Groups that tried to bring him back to Korea in the past include Daewoo's labor unions that had distributed wanted posters at the Kimpo Airport; the Korea Council of Labor Networks & the Jinbo Net that posted Kim's downloadable image on their joint homepage; one former state official who offered an $8,000 reward for Kim's capture; the Daewoo Motor Struggle Headquarters that dispatched a three-member squad to France for Kim's kidnapping; and government prosecutors who received a court warrant to arrest him about a month after they arrested Kim's top lieutenants for fraud and embezzlement.

_What if he returns?

His return will not bring the insolvent Daewoo group back as the 2nd largest chaebol in terms of assets, nor will his return solve the $14 billion debt that led Daewoo Motor to declare bankruptcy on Nov. 30, 2000.

His tangible assets will be seized with or without his presence in Korea, as evidenced by Ansan City Hall's seizure of Kim's real estate there, and the Socho-ku office that put Kim's Bangbae-dong building under restraint, all because of delinquency in property tax payment.

His return should help clarify some of the financial transactions he allegedly manipulated. There is also false expectation that his return would cool off some of public outcry.

_ Is Korea ready for his return?

I doubt it. Daewoo's history is the history of post-war Korea Inc., which evolved because of the close relationship between business leaders and government leaders. Kim used a lot of illicit money to make Daewoo grow. He had to, because such was the system.

It should be a safe bet that anyone who had any power or authority in Korea benefited from Daewoo in many different ways that were not necessarily legal. Kim's return thus represents a massive bribery scandal waiting to explode.

Kim's personal lawyer, Sok Jin-kwang, allegedly dismissed rumors that Kim had a list of political leaders who received bribes by saying that such a list did not exist. The point is that such a list does not have to exist because it probably includes almost everyone in power during the time Kim had been in control of Daewoo.

Understandably, political parties are at odds over prosecutor's probe into Kim's slush funds.

The ruling Millennium Democratic Party (MDP) said that the state prosecutors office should conduct a complete investigation, including where the slush funds might have been distributed in the past. This may simply mean that the MDP was not in power when Daewoo was a rising star. It is highly unlikely that the MDP really wants a complete investigation since some, if not many, members of the MDP could have been targets of Daewoo's bribery in recent years.

The opposition Grand National Party (GNP) whose predecessor, the New Korea Party, grew with Daewoo, also said that the matter should be investigated thoroughly, but expressed concern that the MDP might abuse the investigation for future elections.

The key question is whether Korea is mature enough to handle Kim's case strictly as a legal matter, unaffected by politics and public emotion.

Based on my observation of how Korea's justice system has handled major scandals in the past, the answer is no.

_ How should Chairman Kim's case be handled?

My suggestion is to search for a bi-partisan political solution for his return and closure of the Daewoo mess. I can cite several reasons. The case will involve too many people, further jeopardizing public confidence in the system. The case will consume too much national energy that can be put for better use. The case will be so confusing that facts may not be separated from false allegations or pure fictions.

More importantly, complete closure of the case will require Kim's cooperation that will not come if he is forced to defend himself. Many issues involving Chairman Kim may not be clear-cut, right or wrong, which will further frustrate the public.

In one sense it is a tragedy that the case cannot be resolved solely according to law. Even the court stated that it convicted all Daewoo defendants because they were responsible for dragging the national economy into a financial crisis, suggesting that moral issues, rather than laws, may have been involved in their conviction.

In another sense, however, the case represents the growing pains of the still young Korea Inc. No one should forget that Daewoo made a huge contribution to Korea's post-war economic growth.

Hyundai Motor in Alabama?

By Prof. Chang Se-moon
University of South Alabama

MOBILE, Alabama --Fierce competition among southeastern American states to attract a $1 billion Hyundai Motor plant to make 100,000 to 300,000 cars has been reported almost on a daily basis in recent weeks in the United States.

The states that are reported pursuing the Hyundai plant include Georgia, Kentucky, Tennessee, Virginia, Ohio and Alabama. Southeastern American states have been especially active in attracting foreign direct investment through the provision of generous packages of incentives. Recent attractions of foreign automobile assembly plants to these states include a BMW plant in South Carolina (1992), a Mercedes Benz M-class SUV plant in Alabama (1994), a Toyota pickup truck plant in Indiana (1995), a Honda plant in Alabama (2000), and a Nissan plant in Mississippi (2001).

Alabama is one of seven southeastern American states that comprise the Southeast U.S.-Korea Joint Economic Conference, which is sponsored in Korea by the Korea-U.S. Economic Council.

Reports in recent days indicate that Hyundai has selected Alabama as its site, although the news has been denied by Alabama officials as well as Hyundai officials who indicated that final decision would not be made until March 2002.

I have no way of knowing whether Alabama is Hyundai's first choice. Based on my research on site selection, it is not likely that Hyundai will reveal its decision to Alabama officials even if Alabama is Hyundai's first choice. This is because no deal is final until incentive packages are negotiated, accepted, and signed by both sides.

Hyundai is not likely to admit their selection of Alabama, even if it is true, until Hyundai officials are satisfied with Alabama's package of incentives.

Those who support the alleged selection of Alabama as well as those who have reservations about the selection of Alabama as Hyundai's choice as the place for its first U.S. plant may want to know more about Alabama from a Korean-American who made a career in Alabama working with state and local officials, including Governor Siegelman, who was so happy to read his Korea Times article on Thanksgiving Day during his trip to Korea that he gave a copy of it to Hyundai officials.

Alabama today has little resemblance to the racist state portrayed during the 1960s when George Wallace was its governor. The Marshall Space Center in Huntsville, located in the northern end of the state, is an integral part of the U.S. space program's testing of its booster rockets, while the UAB Medical School in Birmingham with the population of a million is one of top ten medical research universities in the nation, receiving over $100 million NIH research funds each year.

The Port of Alabama, located in Mobile on the Gulf of Mexico waters, has undertaken a $300 million facility improvement with major focus being placed on increasing its container business. There is a regular shipping schedule from Mobile to Inchon. If Hyundai has any plans to invade the South and Central American markets in the future, it cannot find a better port location to start from than the Port of Alabama in Mobile.

This is because ships have to navigate about one hundred miles off a narrow fresh-water ship channel before they reach the Port of New Orleans, the nearest competitor to the Mobile port, from Gulf waters.

Mobile is also one of top 10 golfing cities in the U.S., having hosted the LPGA Tournament of Champions for the past three years. Pak Se-ri was this year's winner.

Alabama is a latecomer in playing the industrial recruiting game, but has been very successful. State and local officials in Alabama like those of other southeastern states strongly favor and support foreign direct investment.

When Alabama offered a $253 million package to Mercedes Benz in 1994 (over $80,000 per direct job in today's price), many laughed. No one laughs any more. Mercedes started assembling its popular M-class SUVs at an annual rate of about 50,000.

The number increased to 80,000 this year and is expected to surpass 100,000 vehicles in the near future.

Honda in Alabama began its production of its popular Odyssey minivan in November this year and plans to produce 120,000 vehicles each year.

One of the most important factors in selecting a vehicle assembly site is the existence of a parts suppliers network. There was virtually no supplier of parts in Alabama when Mercedes opened its door in 1994. This year, the Alabama Automotive Manufacturers Association was formed with 121 member firms. Many of them are auto parts suppliers. One of the latest is Toyota Motor, which broke ground near Huntsville in June to make V-8 engines for the first time outside Japan.

Some readers may wonder how Hyundai's Korean employees will be treated in Alabama. This question may be answered by describing how Koreans are doing in Alabama. There are several hundreds of Koreans and Korean-Americans in Huntsville, Birmingham, Montgomery, and Mobile. There are more than one thousand Koreans and Korean-Americans in the Dothan area south of Montgomery near a large military base.

There are at least two Korean companies in Alabama that I know of, one in Huntsville and one in the Montgomery area. Also, there is one company in Mobile that is managed by a Korean president. There is also a seafood processing plant near Mobile that is owned and operated by the Unification Church.

How Korean employees will be treated in Alabama is not different from how Korean employees are treated in the rest of the United States. It all depends on how hard Korean employees try to adapt to the American way of life and become an integral part of the community in which the Hyundai plant may be located.

It is important for Korean employees to read local newspapers, learn English, attend parents' meetings at schools, and make contributions to local charities. If Korean employees act like foreigners, they will be treated like foreigners. If Korean employees act as if they are caring members of the community, they will be accepted as neighbors by Alabama's residents. I would like to welcome Hyundai Motor to one of southeastern states, if not Alabama itself.

Story of An Old Man Who Drowned

By Chang Se-moon
University of South Alabama

MOBILE, South Alabama--Let me tell you a story. As far as I can remember, this is the way the story goes. There was an old man living alone in a small house somewhere in the American Midwest. There was a flood, a bad one, overflowing the banks of the mighty Mississippi River. When neighbors offered to give him a ride to move away, the old man declined by saying that he believed in God and the God would protect him.

Hundreds of homes were swept away. The flood finally reached the old man's house. When emergency personnel asked him to jump into their boat, the old man declined again by saying that he believed in God and the God would keep him safe.

As the water level rose, the old man crept to the rooftop of his house. When a helicopter dropped a basket for the old man to finally move to his safe place, the old man waved the helicopter away by saying that he believed in God and the God would save him.

The old man drowned.

When the old man reached the gate of the heaven, he asked the gatekeeper why God did not save him. The gatekeeper asked the old man: Didn't your neighbors offer a ride? Didn't emergency personnel ask you to jump into their boat? Didn't you have a helicopter dropping a basket for you to hop in?

Looking back the past 51 years of Korean history, we all should be thankful to the current generation of Koreans for their hard work in achieving the tremendous economic progress.

However, Korea's economic achievement cannot continue without complementing achievements in the rest of Korean society. How many more opportunities will the God give Korea before it destroys the golden egg that gave birth to the huge economic success, especially when the golden egg is still in its infancy?

For one example, consider tax evasion investigation of the news media. Governmental efforts to enforce tax laws should be commended. However, when tax investigation is targeted on news media for the obvious objective of controlling the news media's behavior is a step toward destroying the golden egg.

Democracy in Korea was secured, in large part, due to courageous efforts of the news media during military regimes in the past. If the freedom of reporting is suppressed, corruptions and ineptitude of leaders will go unchallenged, clearly undermining the social fabric that moves economic progress.

Like warnings given to the old man, there were strong protests from numerous professional groups inside Korea, protests from the U.S. Congress through an open letter, and a decision by the International Press Institute to put Korea on its watch list.

What more warnings do we need before we all face the fate of the old man? Free press has to be secured at all costs in order to nurture the golden egg. Free press is not negotiable.

For another example, consider law enforcement in Korea. When I attended schools in Korea, I was taught repeatedly that Korea was a nation governed by laws. It took a long time for me to realize that Korea was governed more by money and power than laws.

Earlier this year, a leading newspaper in Seoul conducted a national poll concerning Koreans' attitude toward the law. According to the poll, 65 percent of respondents do not believe that the law is applicable to them and no less than 70 percent feel that they do not have to obey the law. So much a nation governed by laws!

Please think about the long-term impact of how the thought of condoning lawlessness changes people's behavior to the detriment of Korea's economic progress.

Rightly or wrongly, Koreans are reported to have trained torturers of political activists in El Salvador, beaten and killed workers who tried to organize labor unions at Korean factories in Central America, raped female workers in Mexico, and killed bears and seals in the U.S. for their organs.

Earlier this year, Koreans were also reported to have become rowdy and violent at Taipei and Bangkok airports when they were told that their planes would be leaving late because of bad weather. In fact, the attitude by Koreans of not fearing laws led a Cambodian airliner to leave behind 39 Korean tourists on the Bangkok International Airport's runway and take off. How many more warnings do we need before the world community starts avoiding Koreans?

Korean owners of Cheil de Honduras were reported to have stalled payment to workers for more than a month, and agreed to pay only after all 980 Honduran workers walked out of the factory in early July this year. The agreement read in part that, ``The company will pay the full catorceavos in cash on July 21, 2001.'' The Korean owners were reported to have fled the country in the middle of the night on July 20, 2001. How many more warnings do we need before developing nations such as Honduras begin to refuse investment by Korean businesses?

Apparently, there are 90 or so people in Korea who owe government at least $1 million each of civil fines with at least two owing hundreds of millions of dollars. How many more of these cases does Korea need before the general public becomes totally turned off, if not already, and consider law enforcement only a game that the rich and powerful play?

For another example, consider the sunshine policy, which has been an excellent policy but needs some adjustment. The opposition Grand National Party's criticism of the policy as having ``caused ONLY confusion and conflict in our society as Kim Jong-il wishes'' is simply wrong and destructive. The policy does need adjustments, however, in order to build domestic consensus and support within the South so that the policy can continue beyond the completion of President Kim's term as president.

The unification process is not a game of love that is played with emotion. The unification process is a complex game played by political leaders of both Koreas without knowing how the process will play itself out in the end. It is important to understand that unification in and of itself should not, and cannot, be the policy objective of the South. Only the unification based on freedom should be. To achieve unification built upon freedom, the South needs to be strong militarily, constructive politically, prosperous economically, and healthy socially.

All of us born in Korea need to think of the old man and make sound decisions before it is too late so that the next 51 years can be more prosperous than the past 51 years. It will not be easy but I don't see why it cannot be done because Koreans that I know are more intelligent, harder working and more proud than most people in the world.

Rethinking Seoul's Policies for the Homeless

By Prof. Chang Se-moon
University of South Alabama

MOBILE, Alabama - Figures found during this year's audit by Korea's National Assembly indicated that 442 homeless persons died in Seoul during the last year. The death rate of Seoul's homeless is believed to be more than four times the death rate of the general population. As of August this year, the number of the homeless in Seoul was reported to be 3,210.

I had the opportunity to discuss the homeless issue with the president of a leading research organization in Seoul. When I asked how Korea dealt with the homeless, his response was, "Oh, we took care of them. We relocated them to shelters for free meals and sleeping arrangements."

This response appears typical of the shallow thinking of government officials helping the poor. Seoul has approximately 100 shelters that the city operates. Officials of the city's task force for the homeless have indicated in the past that the homeless, who are beggars with little will to provide for themselves, dislike shelters because of regulations, and do not like to participate in the work programs that the shelters provide.

I have a different perspective. My views on the homeless issue are based on my experience last year as president of the Homeless Coalition of Mobile helping street people in the United States.

Homelessness is not a simple issue that can be solved with a simplistic, albeit well-intentioned approach. To generalize, homelessness has its roots in imperfect housing markets, imperfect labor markets, poverty, economic slowdown, inadequate public policies regarding the treatment of the mentally ill, substance abuse, domestic violence, and, at least in the U.S., lack of access to affordable health care.

One intriguing question regarding government assistance to homeless individuals is to what extent they receive government assistance. At least two studies suggest that only about half of all qualified homeless persons receive government assistance, although actual percentages vary with specific programs.

Why are homeless individuals eligible for government assistance not receiving it?

The reasons suggested by professors doing research on the homeless include a lack of information about the programs, the stigma associated with participating in government programs, the lack of mental capacity to apply for benefits because of chronic mental illness, costs and inconvenience associated with applying for benefits, or failure to fulfill program rules such as work requirements.

Interestingly, the number of people participating in government programs is no higher among the homeless who are not mentally ill, suggesting that a lack of mental capacity is not a major reason of the low participation rate.

This review so far clearly indicates that any serious attempt to help the homeless requires not only good programs, but also helping the homeless apply for program benefits. Those who help the homeless need to be understanding, patient, and most importantly, sympathetic.

In the U.S., efforts to help the homeless are organized as a continuum of care through case management. This means that social workers contact each homeless person, identify his or her needs, introduce programs designed to help, and follow the progress until the homeless person becomes employed.

The most important legislation in assisting homeless people in the U.S. is the Stewart B. McKinney Homeless Assistance Act, referred to in short as the McKinney Act, signed into law reluctantly by President Ronald Reagan on July 22, 1987. Today, the McKinney Act provides hundreds of millions of dollars each year for numerous projects for the homeless initiated by many local agencies helping them.

These agencies include the Salvation Army, the Catholic Social Services, the Volunteers of America, the YWCA, and many other social service agencies helping the needy.

The McKinney Act remains a landmark in legislation. The fact that homelessness shows no signs of abating does not mean that the McKinney Act is a failure; it simply shows how difficult it is to truly help the homeless. It is clear that only by addressing the causes of homelessness such as lack of jobs that pay a living wage, inadequate benefits for those who cannot work, lack of affordable housing, and lack of access to health care, can we truly help the needy and stop more people form joining their ranks.

Based on my observations, there are many people in Korea who are one paycheck away from being street people. In addition, the number of homeless people in Seoul announced by the government is based on one count. The actual number of Koreans who become homeless during part of the year is most likely several times the official count, since some will be in and out of homelessness during the year.

The programs that Korea currently provides for the homeless are nowhere near adequate for meeting their needs. Many, especially in Korea, think that the homeless are mentally ill and lazy.

They are lazy not because they want to be. They simply appear to be lazy because they have no jobs and they are not prepared to compete in the mainstream labor market. Indeed, they may be scared of competing in the labor market.

Many homeless people may well be mentally ill. However, this is not the correct way of evaluating the homeless. Who among us wouldn't be mentally ill if we had to live on street, ignored by family members, friends and everyone passing by? Homeless people are powerless and voiceless. I could be wrong but I have yet to find a politician in a leadership position in Korea who cares about the powerless and voiceless. I am hoping that I am wrong, because I truly want to see a Korean version of the McKinney Act. I would even volunteer to do the research work needed to develop such program in Seoul, if requested.

Korea's Wonderful LPGA Ambassadors

By Prof. Chang Se-moon
University of South Alabama

MOBILE, Alabama _ One of the Ladies Professional Golf Association (LPGA) tournaments is the Tournament of Champions, which invites only those lady golfers who won at least once during the past three years or who are active members of the LPGA Hall of Fame. It is an exclusive tournament with only the very best female golfers being invited. Because all invited golfers are champions, there is no cut.

This year's Tournament of Champions was held in Mobile, Alabama, beginning on Sept. 27 (Thursday) and ending on Sept. 30(Sunday). Mobile has an unusually large number of public golf courses.

The tournament was played at the public Magnolia Grove's Crossings course, one of the famous Robert Trent Jones Trail courses spread across the United States.

Magnolia Grove has two other courses on its compound: the 18-hole `The Falls' and an 18-hole par-3 course. Green fees range from $50 to $75 depending on the season, which is low for Korean standards but high for Mobile standards.

Among the 40 lady champions were four golfers from Korea: Kim Mi-hyun, Pak Se-ri, Grace Park, and Gloria Park. Pearl Sinn was here last year.

Readers of The Korea Times may wonder how Korean golfers are perceived here in the ``real'' America, especially when these golfers win more often than American golfers. In this article, I would like to introduce the way in which Korean golfers are treated in the headlines of local newspapers, rarely making the headlines of AP, UPI or CNN.

Everyone here loved Korean ladies, who behaved as excellent goodwill ambassadors to the United States.

After the first round on Thursday, Mi-hyun was first with -7, Grace was third with -3, Se-ri was 7th with -2, and Gloria was 38th with +5.Naturally, Mi-hyun received the most media exposure as the first round leader.

Mi-hyun was described by the local newspaper as, ``one tough nut to crack,'' after the first round, alluding to her nickname, Peanut. LPGA players, however, do not call Mi-hyun ``Peanut''. They call her ``Tangkung'' using the Korean word for peanut. After the first round, Mi- hyun said, ``Other players tell me how amazing I am because of my height.''

Grace Park also attracted much media attention by posting a good score.

She said, ``Last year I was coming off an injury and I was so sick. This year, I am healthy and looking to have a good tournament.'' Grace, who graciously smiled at Korean supporters, did have an excellent tournament this year.

After the second round, Korea ladies dominated the tournament with Mi-hyun still in first place with -8, Se-ri in second place with -7, and Grace in third place with -6. Gloria improved to 29th with +4.

The headings of the leading local newspaper read, ``Heart and Seoul: Kim leads AFLAC, Korean contingent,'' and stated that Kim Mi-hyun maintained ``Seoul'' possession of the lead Friday in the AFLAC Champions. She had some Korean company around the top of the scoreboard at the halfway point of the $750,000 LPGA tournament. AFLAC is the name of the firm that sponsored the tournament.

Se-ri celebrated her 24th birthday on Friday with a 67 that moved her into second place, attracting the headline, ``Pak blows out candles, competition.''

After the second round, Grace said with her smile, ``We're just good,'' while Mi-hyun said, ``I think everybody who is going over to Korea after the Samsung next week is trying really hard this week. We want to win and have a lot of Korean fans.''

Friday's most difficult hole was the par-4, 380-yard 15th hole, where only five birdies were recorded and where there were 13 bogies and two double bogies. Interestingly, the 15th hole is a unique place where I usually take Korean visitors to because one can watch teeing off at the 12th hole, which lies side by side to the green of the 15th hole.

After the third day of playing on Saturday, Se-ri moved to first place with -15, Grace was third with -7, and Mi-hyun slipped to 17th with -2.

Gloria was 26th with +4. With first place after the third round, media's heading read, ``Pak takes control with birdie binge _ Pak Se-ri reels off six straight birdies to take a seven-stroke lead into final round of AFLAC Champions.''

Se-ri fired an 8-under-par 64 to tie the course record on the Crossings on Saturday, and closed out her 64 with six straight birdies starting at the par-5 13th hole. It was the longest string of birdies Pak has ever enjoyed in her young career. Se-ri enjoyed a seven-stroke advantage, the largest 54- hole lead on the LPGA Tour this year by two strokes.

``I didn't even know,'' said Se-ri. Kim Mi-hyun, the tournament's first and second round leader and was paired with Se-ri during the third round, hit a 6-over 78 and failed to make a birdie during the entire day. She was fun to watch, however, with her signature long swing driver.

After the fourth and the final day of playing, Se-ri won the tournament and $122,000 with -16, Grace was third with -9 and $54,250, Mi-hyun was 12th with -3 and $13,525, and Gloria was 20th with even score and $9,647.

Last year's winner, Karrie Webb, was 8th with -5.

The winning by Se-ri attracted media headings such as ``Pak strolls to AFLAC win.''

``I am very happy and proud of myself,'' said Se-ri. There was a little bit of suspense. With 10 holes to play, Pak had a 10-stroke lead, but a four-hole string of birdies by Lorie Kane combined by a double bogey by Pak at the 15th hole whittled the margin to four shots with three holes to go.

Pak quickly lowered her heart rate with a birdie on the par-5 16th and went on to an easy five-stroke victory.

As many golfers know, Se-ri as a four-time winner this year and the No. 2 on the LPGA money list is pushing to catch Annika Sorenstam in the Rolex Player of the Year, the trophy for the best scoring average and the money- title.

AFLAC dropped its sponsorship as this year's tournament ended. The City of Mobile, which contributed $250,000 to the tournament during each of the past three years, is trying to bring the tournament back and make Mobile its permanent home.

Whatever happens, Se-ri, Mi-hyun, Grace, and Gloria were all Korea's excellent ambassadors to the United States and behaved like champions during the 2001 Tournament of Champions.

The writer is a member of The Korea Times Economic Editorial Board. He is professor of economics and director of the Center for Business and Economic Research at the University of South Alabama _ E.D.

Korean Air and Asiana Deserve Assistance

By Prof.Chang Se-moon
University of South Alabama

MOBILE, ALABAMA--One of the casualties of the terrorist attacks on the U.S. is the annual Korea-Southeast U.S. conference on trade and investment, scheduled for October 4 and 5 in Seoul.

It cost me $150 to have my ticket reimbursed. Even if the conference were held, I would have encountered a complication in my travel arrangement because United Airlines announced the cancellation of its direct flight from Mobile to Chicago as of September 29. I needed the direct flight to catch Korean Air in Chicago at a discount airfare.

I am one of many that Korean Air lost as a passenger because of the terrorist attack. I believe that Korean Air and Asiana deserve financial assistance from the Korean government. Before we discuss the issue, let me briefly summarize economic impacts of the attack to provide an overview.

In the U.S. alone, more than 100,000 job cuts were announced within 10 days of the September 11 attack. Companies that announced job cuts went beyond airline companies, and included 3Com, Honeywell, and Mitsubishi Electric. Retail sales in the U.S. were down about 20 percent during the week after the attack. News media lost revenues because of reduced advertising as well as expanded news coverage that boosted labor and material costs.

What will happen to oil prices in the months ahead is not clear. Oil prices may drop as signaled by the 13 percent plunge on September 24, based on the assumption that economic slowdown and a drop in air travel would depress demand, and that the U.S.-led war on terrorism would not crimp precious Middle Eastern oil exports to the West. Uncertainties may lead oil prices to go up, although less likely, as happened in October 1990 due to instability in the Gulf region despite weak demand.

To keep the U.S. as well as the global economy from sliding into an economic downfall, U.S. congress approved $15 billion aid to the airline industry and a $40 billion emergency aid package related to the attack. The Federal Reserve cut discount rates by a half percent since the acts of terror. There is also a talk of a further tax cut.

How the economy will perform in the months ahead depends greatly on consumer spending, which in turn depends at least in part on the performance of stock prices because of the wealth effect.

It is important to note that disastrous events in and of themselves are not sufficient to trigger major market downturns, which usually result from more fundamental underlying economic trends.

The Consulting Group reviewed trends in stock prices after ten major events, which are the Japanese attack on Pearl Harbor in 1941, the invasion of South Korea by the North in 1950, the announcement of the Cuban missile crisis in 1962, Kennedy's assassination in 1963, the Arab oil embargo of 1973, the Nixon resignation of 1974, the 1987 stock market crash, the Gulf War of 1991, the coup attempt in the Soviet Union in 1991 and the Asian financial crisis of 1997.

The average reaction of the Dow Jones Industrial Average was negative 4.3 percent during the first day, positive 3.0 percent after one month and positive 12.7 percent after one year. The only exception was the 1973 oil embargo, which had a major impact on the economic fundamentals. The 1973 oil embargo was the only event among the ten that led to a negative growth one year later.

The decrease in the Dow Jones Industrial Average on the first day of the stock market after the attack was 4.9 percent, close to the average 4.3 percent of the ten disastrous events reviewed by the Consulting Group.

Interestingly, the faith in the economic future appears stronger in the U.S., hit directly by the terrorists, than in Korea. No less than 77 percent of Americans believe that economic conditions will be very good or somewhat good 12 months from now, according to a USA Today/CNN Gallup Poll taken after the attack.

According to the Korea Chamber of Commerce and Industry poll of 1,993 manufacturing companies, however, 52 percent said that domestic business and economic conditions would remain depressed throughout next year, and another 27.8 percent feared that domestic businesses would continue on a downward spiral in 2002. Only 20.2 percent forecast that local business conditions would improve next year.

How the economic future will unfold depends greatly upon how the fight against terrorism progresses. If significant progress can be made soon against terrorism, layoffs will not spill into the rest of the economy and losses will be offset by insurance payouts, lower interest rates and increased government spending.

As I predicted in my previous article in this column, the fight against terrorism is shaping up as a specialized military operation rather than a full-scale war. I am inclined to be more optimistic than pessimistic about the future of the Korean as well as the U.S. economy.

Returning to Korean Air and Asiana, that suspended numerous flights inside and outside Korea, some suspended flights may have happened even in the absence of the terrorist attack, since both airlines were losing hundreds of millions of dollars prior to the attack this year.

There is no denying, however, that Korean Air and Asiana did suffer greatly because of the terrorist attack that was beyond their control and had nothing to do with their managerial efficiency. Korean Air and Asiana will have to spend additional expenses on security as well as on insurance premiums. No one would benefit if Korean Air and Asiana go out of business for no faults of their own. They deserve financial support.

Impact of Attacks on US Beyond Tomorrow

By Prof.Chang Se-moon
University of South Alabama

MOBILE, ALABAMA--Many in Korea are concerned that the US economy was shaken so much by the terrorist attacks on September 11 that the US economy will slide into a recession, thus seriously jeopardizing the recovery of the Korean economy. I want to be optimistic, albeit cautiously. The immediate impact of the attacks has been widely felt in the United States. Schools, federal offices, local governments, manufacturing plants, retail stores, tall buildings, amusement parks and other offices in many parts of the country were closed temporarily on the day of the attacks. Many businesses, including all airports and stock markets in the U.S., were closed for more than a day. Gas lines reminiscent of the 1973 oil embargo hit many parts of the country, fueled by fears of price increases amid rumors that gas stations would close early or ration gas. Many people canceled hotel reservations they made for the weekend.

Because so many travelers were stranded due to cancellation of flights, one could hardly find a rental car during the day of the attacks anywhere in the country. The chief economist of DRI-WEFA was quoted as having said that the fallout from Tuesday's terrorist attacks would shave a half-point off the US economic growth rate in the final quarter of this year. Since the United States is Korea's most important trade partner, the Korean economy was also affected immediately. Stock prices in Korea on the day of attacks fell, as did stock prices in most other countries. New York branches of Korean banks, such as Hanvit, Kookmin, Shinhan, KorAm, Korea Exchange, and Korea Development Bank, all halted transactions temporarily following the attacks. Exports of semiconductors, computers and other products that depend on airplanes for shipment to the U.S. were all delayed because of the temporary closing of all airports, costing tens of millions of dollars to Korean exporters.

Some forecasters even predicted that the projected 4 to 5 percent growth rate of the Korean economy would be lowered to a 3 percent growth rate for this year, surely worsening the prospects for Korea's already fragile job market. How will the September 11 terrorist attacks on the U.S. really affect the U.S. and Korean economies in the long run? Unlike the short-term setbacks affecting the two economies, it is not likely that the attacks will cause a recession in the US economy and a significant decrease in the growth rate of the Korean economy beyond what had been projected prior to the attacks.

Assuming that what many people say is true, the attacks were made by terrorists, not by a sovereign enemy country. Any counterattack by the United States will be a limited attack, rather than a full-scale war, simply because a full-scale war cannot be waged against this kind of enemy. Slightly rising fuel prices and declining revenues of the air travel and lodging industries are perhaps inevitable in the next several months and are undoubtedly painful for these industries that are already struggling, especially in Korea.

Even the selling of stocks for cash and other safe investments are likely temporary. With little or no probability of a full-scale war, it simply does not make too much sense to continue to sell stocks so long as prospects of an economic recovery are reasonable.

To some extent, exports will continue to suffer a little from tighter security checks at airports and waterways in the United States. The long term impact of the September 11 terrorist attacks on the U.S. and Korean economies depends on a number of factors, which include: will there be more attacks; will the U.S. response provoke a wider conflict; will the U.S. response lead to higher oil prices; which countries will be the target of the U.S. response, and other factors as well. Barring the unfolding of unforeseen events of a major magnitude, the adverse economic fallout of the September 11 terrorist attacks on the U.S. will be minimal.

The economic recovery will hesitate, but resume its course. The consumer spending in the United States will depend more on tax cuts and lower interest rates than on fear of more attacks.

Unlike many other countries, Americans have full confidence in their government's ability to deal with economic and political crises. Within a matter of weeks, Americans will resume normal economic activities, trusting that government will respond to these attacks appropriately.

I can predict that the New York area will go through one of the most robust economic booms the area has ever experienced during the next three years from its recovery efforts. The most serious fallout of the terrorist attacks may well be in international relations. I do not see how anyone or any nation can stop President Bush's missile defense program any more. I also anticipate rising skepticism toward actions of dictatorships such as North Korea. Seoul may well pursue policies toward the North based on these premises. For instance, allowing North Korean warships to pass south of Korean provinces without serious challenges will simply encourage the North to undertake bolder actions of provocation.

As another example, the admiration that recent visitors to the North expressed for Pyongyang's past and present leaders will simply breed more such actions by future visitors to the North.

As a free nation, Seoul should be nice to those visitors who admired the North's leaders, not by prosecuting them, but by giving them a "choice" to stay in the North by revoking their Southern citizenship. Korea as well as the U.S. should take all the incentives away from potential terrorists by any and all means.

Is Review of Sunshine Policy Necessary?

By Prof.Chang Se-moon
University of South Alabama

On August 27 and 28, the Korea-America Economic Association(KAEA) hosted its second conference in two years on the economic implications of reunification. KAEA is an association of economists who were born in Korea but work in the United States.

As usual, the organizers of the conference did an excellent job in inviting quality participants, which included the Hon.Rhee, In-je as a luncheon speaker, and others from Sweden, Germany, Japan, Korea, and the United States.

Perhaps, the most interesting conversation occurred on the evening of August 26 when several of us got together after the official dinner for an informal discussion. There were nine of us; four former and current presidents of KAEA, two KAEA members who are advisors to government officials in Korea, a Korean-Chinese scholar, a widely-known Korean-American consultant on North Korean affairs, and Kim, Myong-chol.

Out of the nine, two travel to North Korea several times a year,one travels to the North once in a while, one was invited this year to visit but was unable to go because of a conflict in schedule, and one member met North Koreans when they came to the U.S. to learn about agricultural technology.

Kim is the executive director of the Center for Korean-American Peace, i.e. chosun-migook, in Japan. He has written two books on North Korea and both are required reading for school children there. He is now working on the biography of Chairman Kim, Jong-il.

Kim is a staunch defender of the North's point of view. He believes the that the current stall in reunification negotiation is the fault of the U.S. and Seoul, that Chairman Kim is ready to visit Seoul but is not going to because Seoul is not ready, and that he may visit Seoul after the October summit between President Bush and President Kim Dae-jung. He also maintains that the linking of the railroad was derailed because of a mix-up in the command structure in the South that had to approve the link through the DMZ. He protests the use of the term - political disaster in the North and says that President Putin of Russia called Chairman Kim a brother, complementing Kim's way of managing issues with the United States.

Obviously, other members of the discussion group expressed skeptical views of Mr. Kim's opinions and a lively discussion resulted. One member who visited the North reminded the group of the possibility of a new direction for Chairman Kim in the ``powerful nation'' through which Kim stressed the usual ideology of military strength, but also the new concept of economic development. He rather wishfully suggested that the North might have shifted its emphasis from military strength to economic development.

Even if I did not share Kim's views on a wide variety of issues, I found him to be very likable and not shy about expressing his views. I came away from the discussion with the optimism that we could at least talk in a friendly manner even if our differences might seem insurmountable at times.

The keynote speech was delivered by Ken Lieberthal of the William Davidson Institute at the University of Michigan, which co-sponsored the conference. Lieberthal essentially echoed my personal conclusion of our group discussion saying that negotiations should continue.

Lieberthal further stated that a sudden collapse of the North is possible although he does not anticipate it; that there would be more food crises in the North; that a slow response by the North prevented President Clinton's visit there, which in turn, led President Kim Dae-jung to lose time in putting in place an irreversible peace process before he completes his term as president later this year; that Japan has no incentive to push for speedy negotiations because it may have to dole out a large amount of reparation money to the North sooner as a result; and that there may not be significant progress in negotiations until 2003.

Lieberthal's keynote presentation preceded our informal group discussion. The spirit of our discussion spread to the first session on August 27, chaired by Ambassador James Goodby.

Panelists in this session included Deputy Director General of Sweden's Foreign Ministry, head of the East Asian Division of Germany's Foreign Ministry, a professor of Georgetown University, a consultant and former vice president of CSIS, and Kim Myong-chol.

According to the panelists, Chairman Kim admits no knowledge of market economy and is suspicious of the peace process. Germany,when it established diplomatic relations with the North, had assurance from Kim that German diplomats would have freedom of movement, freedom to better organize aid programs, guaranteed access to Kim for a dialogue on human rights and would ship 6,000 tons of beef to the North during the next two months.

The panelists also stated that during his visit to Russia, Chairman Kim called for the withdrawal of the U.S. forces from the South, reversing the stance he expressed in the 2000 Berlin declaration and that this reversal may well be a negotiating tactic. Further, they said that corruption is rampant in the North and the labor problem is explosive; that the process of the sunshine policy was too fast and the stall in the process began even before the policy review by President Bush's team; North Korea should talk to the South if it seriously wants peace rather than blaming the U.S. and that the peace process would resume early next year.

My personal conclusion is that the South needs to review President Kim's sunshine policy and to do so in order to secure broader support for it. It is very important to develop a reunification policy that can continue even when political power changes hands.

Finally, Kim Myong-chol drew laughter from the audience when he said that if North Korea is a rogue state, the United States is a bigger rogue, and that President Clinton lost his opportunity to win the Nobel Peace Prize when he decided to work with Monica Lewinsky rather than with North Korea.

When Will the Slowdown End

By Prof. Chang Se-moon
University of South Alabama

MOBILE, ALABAMA-- The Korean economy grew by 10.9 percent in 1999 and 8.8 percent in 2000. The KDI projects this year's growth rate at 4 percent, while the Bank of Korea also revised its growth projection from 5.3 percent to 3.8 percent this year.

Deputy Prime Minister Jin Nyum expects the economy to grow at a 4 to 5 percent rate this year. Jin also has stated that the government has no plans to undertake excessive stimulative measures because of the fear that they may lead to a large government deficit.

The slowdown in the growth rates of the Korean economy during the first quarter of this year was spread widely to personal consumption (0.9 percent from 10.8 percent year ago), government expenditures (-2.6 percent from 1.5percent year ago), business investment (-3.7 percent from 21.9 percent year ago), and exports (8.4 percent from 27.1 percent year ago).

Because of the heavy dependence on exports, the recovery of the Korean economy will be a slow process as long as the slowdown of the U.S. economy and other global economies continues.

The actual growth rates in 2000 compared to the 2001 projected growth rates in a number of countries strongly suggest a global slowdown: Argentina (-0.5 percent to -2.1 percent), Australia (3.7 percent to 1.1 percent), Brazil (4.2 percent to 3.8 percent), Hong Kong (10.5 percent to 2.5 percent), Japan (1.7 percent to -0.2 percent), Mexico (6.9 percent to 1.9 percent), the United Kingdom (3.0 percent to 2.7 percent), and the United States (5.0 percent to 1.2 percent).

In Japan, consumer prices continue to fall. Japan's consumer price index in June this year was 99.5, which is below the base year price index of 100 in 1995. This deflation may reflect Japan's loss in competitiveness against other nations, especially China. A government official has suggested that the trend may be a result of the "Uniglo" effect, a reference to the popular new discount retailer that imports Chinese goods.

The growth rate of the Japanese economy during the past four years averaged less than one percent, including the negative 1.1 percent growth in 1998. During the last 10 years, the Japanese government spent one trillion dollars to stimulate the economy with little success, except for piling up large government debt.

A slow, near zero growth of the Japanese economy in the near future appears to be a near certainty. In other words, Japan is of little help in the recovery of the Korean economy. This leaves the U.S. as the only major economy that can help Korea end its slowdown.

Korea's exports to the U.S. during the first four months of this year were $12.27 billion, an increase of 3.3 percent from the first four months of last year. During the same four months of this year, the growth rates of exports to the U.S. from China (11.5 percent), Germany (7.2 percent), the United Kingdom (5.3 percent), France (15.4 percent), Italy (3.5 percent), and Mexico (3.4 percent) were higher than the Korea's growth rate, while those from Canada (1.6 percent), Japan (-2.1percent), and Taiwan (-4.4 percent) were lower than the Korea's growth rate.

The U.S. economy grew at a 0.7 percent annual rate during the second quarter of this year, which followed 1.3 percent growth during the first quarter. The 0.7 percent, which represents the slowest growth rate in 8 years, is due in large part to decreases in business investment. Resilient consumer spending and a large increase in government spending prevented the U.S. economy from recording the first quarter of negative growth in more than a decade.

The U.S. economy may either have experienced the worst during the second quarter, suggesting good news for Korea, or be edging toward a recession, suggesting bad news.

Which way will it be?

A pessimistic view on the future of the U.S. economy is that consumer spending, which has been strong until now, may slow down with a rising unemployment rate; that industry is operating at 77 percent of capacity, the lowest since 1983; and that business investment may still decrease further before rebounding, because of lower profits and the frailty of the global economy.

An optimistic view on the future of the U.S. economy is that the inflation rate is low; that energy prices are falling; that interest rates have been lowered; that government has a revenue surplus; and that tax cut checks began reaching consumers.

Further, the composite index of the leading indicators increased for three months in a row, due in large part to expansionary monetary policies of the Federal Reserve, while the consumer confidence index increased for two months in a row.

A cautious view also merits attention in that the breadth of the recovery is fragile and narrow; that industrial production has declined for 9 consecutive months; and that the National Association of Purchasing Management (NAPM) index rose to 44.7 in June from 42.1 in May, but is below the critical threshold of 50, indicating a still shrinking manufacturing sector.

I would take side with the optimistic view for several reasons. Lower interest rates finally started having an impact; tax cut checks will improve retail activities; falling industrial production reduced business inventories; and both leading indicators and consumer confidence are rising.

Because of the drag from the global slowdown, however, a meaningful recovery may arrive a little later this year in the U.S. and thus early in the next year in Korea.

In the meantime, I urge Korean businesses to review and update export strategies, especially in relation to rising exports and competitiveness from China, to avoid becoming another victim of the

Uniglo" effect. It is important to anticipate the changing global market demand through market research.

I also urge Korean businesses to expand their global export markets, at least in part, through a more efficient use of web sources. Numerous organizations post the names of potential buyers on their websites, which include EC Plaza, Silkroad21, World Trading Information Center, Buyersguide, Global Sources, Shinestar, AsiaMart, the Government Commerce Network, the U.S. Commercial Service, and more. Many of these websites for export opportunities, as well as the names of global buyers that are circulated among leading ports in the U.S., are linked to, which can be accessed freely by anyone. Professor Chang is a member of The Korea Times Economic Editorial Board. He is a professor of economics and director of the Center for Business and Economic Research at the University of South Alabama. Chang was president of the Korea-American Economic Association (KAEA) in 1999 and president of the Association for University Business and Economic Research (AUBER) in 1999. AUBER is a national association of business research centers in the U.S. with a membership of 120 universities-E.D.

Market Economy Korean Style

By Prof. Chang Se-moon
University of South Alabama

MOBILE, ALABAMA--Every time I go to economists' meetings, all I hear is unending criticism about the poor policy decisions that Korean government officials have allegedly made on economic issues. I have yet to hear any compliments about
good work that these officials have done.

Perhaps, the most interesting criticism that I hear is that government officials in Korea do not know what kind of market economy will fit the Korean economy. Some have even described the government's efforts at structural reform as ``tango reform'' where they seem to move two steps forward and then three steps back.

Given the Korean economy grew as much as it did in such a short period of time, there is no sense in blaming anyone. What matters is how to make an improvement for today and tomorrow. In addition, economic policy makers have generated
numerous improvements in the Korean economy since 1997. For instance, Korea undertook major corporate restructuring by taking steps to increase the number of shareholders able to exercise their rights, adopt international accounting standards,
require a greater involvement of outside directors on the boards of domestic corporations, inject more competition into financial markets, reduce excess capacity, reduce corporate debt-equity ratios, and much more. What Korea did in corporate
restructuring is not unique to the country. Reform policies in Korea are a variation of what is known as the London approach, which was also adopted by Indonesia, Malaysia, and Thailand in the aftermath of the 1997 crisis.

The London approach of restructuring unsustainable corporate debt was promoted by the Bank of England during the U.K. recession of the mid-1970s, and encourages creditors and debtors to follow certain principles such as minimizing losses to
creditors, avoiding liquidation of viable debtors, and continuing financial support to viable debtors in out-of-court restructuring agreements.

An ideal market economy is based on free competition for increased profits and subject to rules and regulations that ensure competition to be fair to all participating agents, at least in principle. Free competition is the driving force of a market economy
but a real market economy is not as ideal as it sounds. Free competition leads to numerous business failures as well as successes. There are many people who suffer from failing businesses. Workers lose jobs, investors lose money, and their family
members suffer from financial setbacks that can at times be severe.

A key test of the type of market economy that Korea or any other nation may envision being relates to how the government deals with failing businesses. If failing businesses are small in size, they are usually allowed to fail with little attention from
the public. If failing businesses are large in size, with thousands of employees, the government may or may not intervene to save it. If the government is expected to bail out failing businesses, there is a morally hazardous problem since this expectation may
lead business managers to undertake greater risk. Expectations of a government bailout may therefore actually increase the number of business failures. Many scholars claim that this is what happened in the 1997 financial crisis, saying that investors in
large businesses in Korea took greater risks because they assumed that the Korean government would not allow their businesses to fail.

An interesting point that we need to keep in mind is that governments of all nations, including the U.S., bail their failing businesses out once in a while. Telling the Korean government not to bail out failing businesses is unrealistic. On the other hand,
spending over $130 billion (170 trillion won - about 4 million won per person) to bail out financial institutions, as the Korean government has been doing from 1997 and will continue to do until the end of this year, doesn't sound right either.

The key questions that government policy makers in Korea need to ask themselves prior to intervening with private enterprises are: Is this intervention absolutely necessary? Will the market do the same even if it takes a little longer? Are the benefits of the intervention clearly greater than its costs?

Note that the primary interest of government policy makers lies not in who manages the failing business but in saving jobs and holding onto the Korean share of the business in the global market. If other Korean firms can take over a failing business,
there is no reason for the government to intervene because jobs and global market share will be protected.

Consider the five largest chaebols - Samsung, Hyundai, Daewoo, SK and LG. LG and SK have not used taxpayers' funds. LG has merged the insolvent LG Merchant into its securities subsidiary without demanding taxpayers' money. SK Securities       survived technical bankruptcy with SK's own funds, not with taxpayers' funds. Obviously, the management of LG and SK should be praised and be given ample opportunities to take over the ailing units of Samsung, Hyundai, Daewoo and others
before these are helped with public funds.

Consider the government's plan to restructure the telecommunications industry, currently dominated by Korea Telecom and SK Telecom, that surprised even those in the industry. Minister Ahn pointed out excessive competition and duplicating of                investment in the Korean telecommunications industry. Excessive competition and duplicating investment are a way of moving towards an equilibrium in a market economy. The government initiative in restructuring the telecom industry would be
another good place to ask the question: Is government intervention absolutely necessary?

Consider the three insolvent life insurers - Hyundai, Samshin and Hanil. This is not a simple case. If the three firms were allowed to fail without any measures taken to help the policy holders, the public would criticize the government officials for not having
done anything. Some intervention by the government was probably necessary.

According to the Bank of Korea, more than $27.9 billion (26 trillion won) of corporate debt will mature during the second half of this year with the tightest months being October through December during which about 60 percent of the debt               becomes due. This potential liquidity crunch will affect everything from large semiconductor makers to smaller firms in industries that include steel and shipping.  Bailing out a private enterprise and intervening in the private sector may be necessary                 once in a while, but it should be done so sparingly and transparently that all private businesses are discouraged from expecting such a possibility. Remember the "absolutely necessary" test.

When the liquidity crunch time comes later this year, the decision-making process of government officials will be tested again since many of the companies that will be most in need of refinancing are those that are exposed to exports and they make up
more than 40% of Korea's gross domestic product.

Privatization of State-Owned Enterprises

By Prof. Chang Se-moon
University of South Alabama

MOBILE, ALABAMA _ The issue of privatization seems important in Korea, at least in part because candidate firms for privatization include such large employers as Pohang Iron and Steel (POSCO) and the Korea Electric Power Company (KEPCO).

Other candidate firms include Korea Telecom, Korea Tobacco & Ginseng, Korea Heavy Industries & Construction, Korea Gas, Korea Technology Banking, Daehan Oil Pipeline, and Korea District Heating. Korea General Chemical and National Textbook have already been sold for private ownership.

Since the privatization of state-owned enterprises (SOEs) has been a major component of Korea's post-1997 economic reform movement, it may be a good idea to review privatization experiences in other countries so that Seoul's policy makers may decide how hard they should push for privatization of Korea's state-owned enterprises.

There are several issues that need to be considered in the privatization of SOEs, which include (i) whether privately-owned enterprises perform better than state-owned enterprises, (ii) whether performance can be improved without changing the ownership, (iii) whether mixed ownership can be a better alternative, (iv) whether there will be a massive layoff of employees, (v) whether there will be a role for the government to play when SOEs are privatized, and (vi) whether privatization is always preferable to state ownership.

In the June, 2001, issue of the Journal of Economic Literature, William E. Megginson and Jeffry M. Netter published an article on their survey of empirical studies regarding how successful privatization efforts of many countries have been during the past 20 years. Let me introduce answers to the above questions based on findings by Megginson and Netter.

Do private firms perform better than state-owned firms? Better performance means more profitable, lower indebtedness and fewer labor intensive production processes.

The article by Megginson and Netter reviewed 22 studies from non- transition economies and 11 studies from transition economies such as eastern and central European economies and former Soviet republics as well as Russian economy.

All these studies, especially those on transition economies, indicate that privatization is associated with improvements in the performance of divested firms.

Can performance at SOEs be improved without changing the ownership? This question is raised because some argue that competition and deregulation are more important than privatization or governance change in improving performance of firms.

In 1990, Poland undertook ``big bang'' reforms by deregulating prices and introducing foreign competition to many domestic industries. However, the Polish government did not immediately launch a large-scale privatization program. Instead, the Polish government adopted incentive contracts for managers and workers, tightened bank lending, and consistently carried out ``no bailout'' signal to weak enterprises. Two studies indicate improvement in the performance of Poland's SOEs.

Limited evidence has also been found in China's experiment in that non- privatizing reform measures, such as price deregulation, market liberalization, and increased use of incentives, can improve the efficiency of SOEs.

Megginson and Netter, however, conclude that non-privatization reforms would be even more effective if these reform measures are coupled with privatization.

Can a mixed ownership through a joint ownership between the government and private investors be a better alternative? Boardman and Vining examined the 500 largest non-U.S. industrial firms and concluded that both state-owned and mixed enterprises were significantly less profitable and less productive than were privately-held firms, suggesting that full private control, not just partial ownership, is essential to achieving performance improvement.

Will there be a massive layoff of employees when SOEs are privatized? This is one of the major concerns, if not the major concern, of policy makers who consider privatization of SOEs. Megginson and Netter reviewed 10 studies that examined the impact of privatization on employment.

Of the ten, three studies documented significant increases in employment, two studies found no significant changes in employment, and the remaining five studies documented significant decreases in employment following privatization of SOEs.

The impact of privatization on employment may depend on how ready SOEs are to meet the competitive challenge at the time of privatization.

It may be important to give time for SOEs to work on, and thus prepare for, privatization to minimize any adverse impact of privatization on employment.

Will the government become less important or will there be a role for the government to play when state-owned enterprises are privatized? A question for the post-privatization world is the role of the public sector in the economy and the regulation of firms.

The alternative to state ownership is rarely purely private, unregulated firms. The government will have to continue to create a competitive environment in which private firms are provided with incentives to grow.

For example, the Korean government worked on the creation of a competitive environment in recent years by eliminating intra-group debt guarantees, requiring a consolidated financial statement audited by international accounting firms, establishing the Korean Investment Service Center, passing the Foreign Investment Promotion Law, requiring a lower debt-equity ratio for large corporations, and strengthening anti-trust laws.

The post-privatization role of the government may be different but just as important as its pre-privatization role.

Finally, Megginson and Netter point out that the harmful effects of state intervention are greater under state ownership than under state regulation, that the harmful effects cannot be eliminated through privatization, and that privatization is preferable even for public goods and natural monopolies where competitive considerations for privatization are less compelling.

Confidence Building Measures for Unification

By Chang Se-moon
University of South Alabama

MOBILE, ALABAMA _ From June 22 to 24, this year, the International Council on Korean Studies sponsored a highly successful conference in Washington, D.C., commemorating the 50-year anniversary of the Korean War.

Speakers included numerous dignitaries, former generals and scholars on Korean affairs from both continents.

One of the speakers was 81-year old General Paik Sun-yup, who was so sharp in his luncheon presentation that he recalled all the important dates during the Korean War and even corrected translations when names were not pronounced correctly.

This was the first time I personally met General Paik. He was truly impressive.

Another speaker was USAF Major General (retired) Nels Running, director of the 50th Anniversary of the Korean War Commemoration Committee, who reminded the audience during his dinner presentation of the total insanity of the Korean War and the sad feeling for not being able to unify Korea when the war ended.

During the course of the two-day conference, several presenters mentioned CBMs between the two Koreas, i.e., confidence building measures. CBMs are clearly needed since there cannot be unification without each side having confidence in understanding the intentions and directions of the other side working toward the same goal of unification.

As Professor Han Yong-sup of the Korea National Defense University suggested, CBMs are needed for both Koreas to reduce the fear of the unlikely surprise attack by either side for complete victory, the fear of a surprise attack by the North to seize Seoul as a negotiating chip, or the fear of a surprise attack by the U.S. on selected military sites in the North.

In today's column, however, I would like to discuss the other CBM that is just as important, i.e., consensus building measures within the South.

Ralph A. Cossa, president of the Pacific Forum CSIS, stressed the importance of domestic consensus and support for the sunshine policy within the South by stating that North Korea is not the only one capable of derailing the current initiative, and that the Kim Dae-jung Administration and opposition party leaders have failed to reach a bipartisan consensus on President Kim's Sunshine Policy toward the North.

The main opposition Grand National Party (GNP) has severely criticized President Kim's conciliatory approach to the North and the GNP's presumptive candidate in the 2002 elections, Lee Hoi-chang, has made little effort to join with President Kim in crafting a bipartisan policy toward the North.

Making matters worse, former President Kim Young-sam has demanded that his successor extract an apology for the Korean War from Kim Jong-il before allowing the North Korean leader to visit the South.

Cossa concluded by stating that, ``It would be an absolute tragedy if, at this historic moment, domestic politics in the ROK were to unravel the peninsula's greatest opportunity for North-South reconciliation since the peninsula was divided.''

No one, including President Kim Dae-jung, can escape the blame for the absence of domestic consensus in how to conduct the sunshine policy, which all participants of the conference agreed is the best policy among alternatives.

Obviously, peaceful unification is the most important task that both Koreas are faced with at this juncture in history.

The way the South's political leaders argue over policies toward the North reminds me of a husband who kills his wife who wants a divorce and then goes to prison for the rest of his life for the killing. Can leaders in Seoul put national interests over their personal interests on this most important issue of developing unification policies?

I clearly feel that President Kim Dae-jung can, and should, do a better job of communicating with opposition leaders and building a domestic consensus on his brilliant sunshine policy. I also strongly feel that opposition leaders can, and need to, provide positive and constructive policy alternatives on government actions toward the North before they criticize President Kim's leadership on unification issues.

Think of this other CBM because numerous issues, past and future require all the brains we can muster in the South for proper response.

For instance, assume that the peace process progresses and the North economy develops rapidly with a large economic aid from the international community. Are political & business leaders in the South ready to respond?

The key to the sunshine policy is to continue dialogue and exchange, which will inevitably force the North to open its people to the outside world.

Does anyone know how dangerous a path this policy can lead to although all agree that it is the best policy we have?

Some presenters at the conference believe that the reason why the North's Kim Jong-il has yet to decide on his visit to the South is his reluctance or inability to agree on a peace treaty that needs to be included in the joint statement during his visit. Do leaders in the South know how to take care of the issue while criticizing each other?

Sooner or later, the U.S. will drop the North from the list of terrorist nations and allow MFN import duties on the North's exports to the U.S., effectively complementing the June 19, 2000, lifting of economic sanctions against the North. Are leaders in the South ready to face the challenge that may come sooner rather than later?

Think of 1,060,968 civilians of the South, 301,886 ROK soldiers and 33,741 U.S. soldiers, let alone 2.5 million people of the North and the PRC, who lost their lives during the Korean War 50 years ago. Don't we owe them at least our efforts to work together and develop unification policies that can continue beyond the completion of President Kim's term as president?

American Card in Controversial Japanese Textbook Issue

By Prof. Chang Se-moon
University of South Alabama

MOBILE, SOUTH ALABAMA-- On May 31, Ed Bradley, substituting for Dan Rather, included the Japanese textbook issue during the CBS Evening News, thus introducing the controversy to mainstream America.

Bradley reported that the new junior high textbook denied the history of comfort women as sexual slavery by not reporting its existence, and treated the Nanking Massacre by simply stating that some people were killed.

Bradley concluded the news report by stating that the new textbook appears to suggest that ``evils of wartime atrocities can be cured just by ignoring them.''

This reporting during the popular CBS Evening News, that millions of Americans watch, raises the potential of bringing an American card into the controversy to the detriment of Japan. Let me explain.

As everyone knows, numerous efforts have been made to prevent Japan from officially adopting the distorted textbook. These efforts include, although are not limited to: a hunger strike outside the Diet, Japan's parliament, by Kim Young-jin, a
Korean lawmaker; the recall of the Korean ambassador by the Korean government; appealing the textbook issue to the United Nations Commission on Human Rights; and cooperation with the Chinese government in protesting the distortions in the
revised textbook.

In April, protests over the textbook issue were organized by Korean- Americans in over 20 cities in the U.S. that had a Japanese Embassy or Consulate. In Atlanta, for instance, more than 200 Korean-Americans protested the textbook distortions in front of the Japan's Consulate.

All these efforts are needed but obviously not enough. Why not? As Kim Il- pyong, a professor emeritus of Political Science at the University of Connecticut who is widely respected by Korean-American scholars of all disciplines, explained, the distorted
textbook is not an isolated issue that was created this year, but an issue with a root in the upsurge of Japan's right-wing nationalism that began in the 1970s.

According to Kim, the rise in Japanese right-wing nationalism is similar to the rise of fascism and nationalism in the 1930s in Japan and in Germany that eventually led to World War II. The new right-wing movement in Japan tries to glorify Hirohito by
claiming that he did nothing wrong in making the decision to attack Pearl Harbor.

Further, the Japanese right-wing groups that are behind the textbook distortions are spread throughout Japan and well organized. Those who support these groups include professors at well-known universities in Japan.

For instance, Nobukatsu Fujioka, who is one of the ten authors of the textbook that ignores Japan's wartime atrocities, is a professor at the University of Tokyo.

Fujioka was quoted as having said that, ``China has no right to say things about our textbooks. The same goes for South Korea.'' He also was quoted to have said that any demands made by Beijing or Seoul on the textbook issue would be tantamount to intervention in Japan's internal affairs.

Tadae Takubo, a professor at Tokyo's Kyourin University, suggested separately that Japan was not the only country that had comfort women for its troops.

I wonder what they would have said if their wives, daughters, mothers and sisters were forced to be comfort women of another nation's soldiers. I really wonder.

I do not know whether Japanese political leaders are sympathetic with the dangerous right-wing movement in Japan. Regardless, it is clear that they are reluctant to stop the adoption of the new textbook.

It is obvious that the battle toward correcting historical distortions in the Japanese textbook will be a long one with no guarantee that the battle will be won.

Some suggested measures included postponing civilian exchange programs with Japan, suspending openings to Japanese pop culture, and undertaking efforts to block Japan's bid to secure a permanent seat in the United Nations Security Council.

I do not believe that these measures will be effective. These measures sound more like screams of the weak.

It is highly unlikely that Japan will turn around and accommodate Korea's wishes by correcting false and vicious information in their textbook, so long as the Korean economy is smaller than theirs.

This is where Bradley's report during the May 31st CBS Evening News comes in.  The report opened a door for the Korean government and numerous Korean-American business as well as civic organizations to play a role by publicizing in                 printed news media in the U.S. all historical facts about Japan's atrocities during World war II, a danger of the new right-wing movement in Japan toward world peace, and a danger of supporting Japanese businesses that show no signs of curbing
the rise of the country's new right-wing movement.

Japanese business leaders and certainly the Japanese government leaders will pay attention to these efforts since they should be concerned about the long-term impact of such efforts in the vast American market on their economy. At least, strong and
free nations need to be aware of the new danger looming on the Japanese horizon. []

Lawsuits Involving Korean Motor Vehicles

By Prof. Chang Se-moon
University of South Alabama

MOBILE, SOUTH ALABAMA--In my last article for this column, I presented an overview of lawsuits in the U.S. that involved Korean firms. In today's article, I will review five lawsuits in the U.S. that involved motor vehicles made in Korea: four  involving Hyundai and one Kia.

In April 1995, Ms. Jodi Carlson was a passenger in a Hyundai Excel that veered off the road and rolled over. Though she was  wearing a seatbelt and a shoulder harness anchored to the door frame, Ms. Carlson was thrown from the vehicle through an    opening in the upper rear portion of the front passenger door.

Ms. Carlson claimed that she was injured because "when the doorframe bent out it eliminated any effective passenger     restraint." Ms. Carlson suffered serious injuries. In 1996, she filed a lawsuit in Minnesota state court, seeking substantial damages.

All of Ms. Carlson's claims were premised upon a crashworthiness theory. According to her claim, the Hyundai vehicle had a   defectively designed and manufactured seatbelt system and door frame that caused Ms. Carlson to be ejected during the accident. In other words, if the seatbelt system and the door frame of the vehicle were manufactured without defects, Ms. Carlson claimed that she would not have been ejected from the vehicle.

The Minnesota district court granted the motion by Hyundai to dismiss the lawsuit. The court explained that Ms. Carlson's        claim of a defective seat belt system was barred under the Minnesota's seatbelt gag rule because she did not state in her       complaint that a defect in the door frame caused her injuries separately from the seatbelt system. Her appeal was denied and    Hyundai won.

In another case, Ms. Joycelyne Stamper was transporting four of her children to Indianapolis in her Hyundai Excel in 1991 when the car was involved in a collision. One daughter was killed, and another was ejected from the vehicle and sustained severe and permanent brain damage. In March 1992, the Stampers filed suit against Hyundai alleging that their Hyundai Excel, which had split in half through the passenger compartment along a seam of welds, was in a defective condition and unreasonably dangerous.

In January 1995, the case was tried before a jury which rendered a verdict in favor of Hyundai. In January 1996, a second trial  was held and the jury again rendered a verdict in favor of Hyundai. Apparently the Stampers were not able to prove to the     jury that their injuries were due to their alleged claim that the Excel was not crashworthy.

The third case also involved an Excel. Ms. Rowena Rodriguez, then twenty-seven years old, suffered severe injuries when the    1988 Hyundai Excel-GL in which she was riding as a passenger rolled over. Ms. Rodriguez sued Hyundai and its dealer, alleging that the vehicle was not crashworthy because its roof structure, padding and its passenger restraint system were defectively designed so that she was thrown into the roof in the accident and injured more seriously than she would have been otherwise

Hyundai contended at the trial that Ms. Rodriguez's injuries were caused not by her impact against the roof of the vehicle        but by her ejection from the vehicle due to her failure to wear a seatbelt, or by the negligence of the driver, Mr. Cruz.

This case reached all the way to the Texas Supreme Court that ruled in favor of Hyundai, partly because any alleged defect of   the Hyundai vehicle was not the cause of the accident. The fact that Ms. Rodriguez was not wearing a seatbelt at the time of the accident may also have worked against her.

In another case involving a Hyundai car, a Ms. Perry began experiencing electrical problems with the car shortly after she        purchased it in Birmingham, Alabama. She contended that the dealership was unable to repair the electrical problems, and       that its failure to repair resulted in her suing the dealer and Hyundai.

Ms. Perry alleged that the Hyundai dealer hurried her through the purchase of her new car and did not give her an opportunity    to read the purchase-agreement form before she signed it. The form contained an agreement that required the purchaser to       arbitrate all disputes with the seller. She did not want an arbitration.

This case was sent to the Alabama Supreme Court, which found that her allegation was insufficient to prove that her signature    was induced by fraud. So the Supreme Court of Alabama ruled in favor of Hyundai.

Finally, Ms. Amy Lucy took delivery of and accepted a vehicle from Kia Motors America, which Ms. Lucy leased through Bank One Acceptance Corporation. The vehicle was covered by a written warranty supplied by Kia as well as other warranties implied by law. Ms. Lucy apparently was not happy with the car and wanted to return it under the Virginia Motor Vehicle Warranty Enforcement Act called the Virginia Lemon Law.

When Kia refused to accept the return claiming that the Lemon Law did not apply to a lease situation, the court sided with Ms.   Lucy by allowing her to return the car.

One factor that automobile manufacturers, and manufacturers of any product for that matter, need to consider is the possibility   of winning a battle but losing a war. Defending a case costs money. Having a case publicized through lawsuits may cost more   money because they can lead to poor public relations resulting in reduced future sales. Sometimes, although not always, it is      more economical to simply accommodate consumer complaints than to go through litigation. []

Lawsuits Involving Korean Firms in the United States

By Prof. Chang Se-moon
University of South Alabama

MOBILE, SOUTH ALABAMA _Last August, I had an opportunity to speak to a group of Korean government officials and private sector researchers in Seoul about lawsuits involving Korean firms in the United States.

The level of interest was so high that I decided to pursue the project further and started gathering data on as many cases as I could in which Korean firms were involved. I also had a chance to talk with selected leaders of Korean businesses operating in the United States.

These cases are clearly an interest, if not a concern, to many, including Korean firms with operations in the U.S., Korean firms  planning operations in the U.S., existing branches & plants of Korean firms in the U.S., all foreign firms with operations in        the U.S., all foreign firms planning operations in the U.S., international business classes at colleges & universities in Korea, law school scholars & students in Korea, and, needless to say, policymakers in Seoul.

The ultimate objective of such studies is to identify causes and effects of these lawsuits and to eventually explore ways to        reduce legal expenses as well as loss of productivity.

In this sense, my project has a long way to go, but I feel it worthy of reporting an overview to readers of The Korea Times       just to show the scope of the lawsuit problems involving Korean businesses operating in the U.S. or with partners in the U.S.

The number of U.S. civil cases identified so far that involved Korean businesses is 75 at the district level and 61 at the          appeals level. Some of the appeals cases are those appealed from lower court cases already identified.

Obtaining details of rulings is difficult because summary judgments without a trial are usually accompanied by a good               analysis but many trial verdicts show only the outcome without much analysis. Nonetheless, I have collected copies of rulings    on many of these cases.

Four cases that involved airlines relate to wrongful death as well as pain and suffering that resulted from airline accidents.        One case involving KAL 007 that was shot down by a Soviet fighter reached all the way to the U.S.Supreme Court.

Five antitrust cases are directed to rice and exporters of house wares from Korea, while many antidumping cases are targeted  toward Korean chaebols.

More than ten cases relate to breach of contract. Several Korean companies became defendants in these lawsuits while other Korean companies were the plaintiffs.

Companies involved in these breach of contract lawsuits include Eagon, Hyosung, Bank of Korea, Hanil Bank, Korean Electric  Power, Korea Express USA, LG, Lotte Trading, Tongkook, USS POSCO, Daewoo, Korea First Bank, and several U.S. firms representing Korean businesses.

In addition to breach of contract in general, there were also cases on breach of joint venture agreement, breach of lease           obligations, breach of warranty, and copyright infringement.

Cargo damages and improper delivery was also a frequent target of lawsuits. There were at least thirteen lawsuits that involved   cargos damaged while shipping. Korean companies involved in cargo damage lawsuits are mostly those that operate ocean      transportation or container business as well as those that used other shipping lines.

The names include Cho Yang, Hanjin, Hyundai, Daewoo, Hyosung, and others.

It is important to note that Korean businesses are plaintiffs as well as defendants.

Cargo damages relate to ocean shipping. Separately there were cases of goods that were not damaged, but disappeared while   being shipped. These cases involved not only shipping lines but airlines as well.

Several cases involved employment issues such as claims of retaliatory discharge, wrongful discharge, and disputes on             collective bargaining agreement.

In addition, there were at least ten cases of wrongful or personal injury that involved Korean firms. Wrongful death or              injury cases are so common that there are many attorneys in every part of the U.S. who specialize in such cases.

Interestingly, I assisted attorneys on over 100 cases of wrongful death or injury as an expert economist.

There were about 30 cases on finance or payment dispute. These cases are diverse and include such claims as failure to pay,     fraudulent transfer, improper payment of check, foreclosure of mortgage, liquidation, illegal contract, unpaid freight charges,      unpaid commission, wrongfully denied insurance benefits, and unjust enrichment.

Many commercial banks and insurance companies in Korea were the targets of these lawsuits.

Understandably, many cases relate to trade disputes. Typical issues on trade disputes include illegal use of trade secrets,          unfair trade practices, fraudulent importing, and many cases on claims of trade infringement.

The American legal system is very complicated. Some business practices may be illegal in one state but are illegal in another       state.

The American legal system is also very slow. One KAL 007 case that reached the U.S. Supreme Court took ten years from the time the plane was shot down to the time of the Supreme Court verdict.

It is always best to stay away from litigations. Because of the nature of the Korean economy that heavily depends on exports of  goods and services, however, it is unavoidable for many successful and well-managed Korean businesses to get involved in     lawsuits in the global market place.

The idea is to understand issues that are likely to lead to litigation and develop strategies that will minimize the probability of getting involved in lawsuits.

In the next article, I will illustrate lawsuits on motor vehicles manufactured by Korean automobile manufacturers to explore what the issues are at least in cases involving motor vehicles.

Strange Speech by Chairman Greenspan & Secretary O'Neill

By Prof. Chang Se-moon
University of South Alabama

Both Alan Greenspan, chair of the board of governors of the U.S. Federal Reserve System, and Paul H. O'Neill, the Bush      Administration's new secretary of the U.S. Treasury Department, admitted that it was rare for them to appear as back-to-back  speakers at the same place. But they did on March 27, this year.

The occasion was the Washington Economic Policy Conference, sponsored jointly by the National Association for Business    Economics (NABE), which boasts over 3,000 business economists as its members, and the Association for University Business & Economic Research (AUBER), that has more than 100 university research centers as its members.

Because of the uncertainty that shrouds the economy and faltering stock prices, the scheduled appearance of Greenspan         and O'Neill attracted wide attention from the media, which included all major media in the U.S. and a number of media            representatives from Japan. All major TV stations in Washington repeated their intention to cover the speeches and CNN announced its plan for live coverage of Greenspan's speech.

I attended as a member of AUBER, and found no one from Korean media that I could identify. In fact, many of us attended the conference specifically to hear what Greenspan and O'Neill might say that could give us a clearer picture of the future of the     global as well as the U.S. economy.

When I went to the room at about 7:30 in the morning, there were about 20 television cameras zoomed on the podium. Although attendance was limited to invitation only, the room was already full. An excitement was clearly building up.

Breakfast was over by 8:30. When Greenspan was introduced to the audience, the NABE's president told the audience that Greenspan did not wish to entertain any questions from the floor. A little strange feeling was creeping in.

When Greenspan finally started his prepared speech, it was obvious that he had no plans to talk about the economy, the         stock market, or anything that might be interpreted to influence the economy or the stock market.

As best as I can remember, Greenspan said that econometric models did not outperform other simpler models, that we need to  augment existing data and retrieve more information from existing data, that we need to have a better understanding of             what is meant by output and price, that we do not know what the unit of medical output is, that we thus do not know how to    measure prices of medical services, that information technology represents only 8 percent of the manufacturing output but        accounts for two-thirds of all productivity increases in the U.S. economy, and that we need a better measurement of the          changing economy.

O'Neill, who became famous reviving an old industry using new technology in the Pittsburgh area, is well known to speak his    mind. When O'Neill began his speech, he even commented half-jokingly that he plans to continue to speak his mind O'Neill, however, was a little better than Greenspan but not much. His prepared speech was a party line promotion of President Bush's tax cut plan although his speech on the day was billed as his first major address on economic policy.

O'Neill stressed a permanent change in consumption pattern by cutting marginal tax rates permanently. He suggested that Japan's economy was in a bad shape because the savings rate was too high, earnings did not support asset values, and the economy was not widely open to the rest of the world. He did stress, however, the importance of having a strong Japanese economy.

Was I disappointed in the two widely anticipated speeches? No, I was not, but what they didn't say is important.

In case of Greenspan's speech, I can see that he did not touch on such topics as interest rates, stock markets, and slowing     economy, at least in part because the public try to read too much out of his intended statement rather than accepting his           statement as is. He probably wants to speak through his actions such as the latest 0.5 percent cut in discount rate rather than     through words.

In addition, there are so many mixed signals that no one really knows which direction the slow U.S. economy is headed for the  next 6 to 12 months.

O'Neill's case is a little different. Bush has been reported to hire good people and trust their judgment. I do not believe this      assessment is accurate at least based on his performance to date. Bush's conservative advisors seem to enjoy an upper hand    at least at this time. Let me cite two reasons.

One is that O'Neill gave me a strong impression that he would really like to speak his mind, but feels constrained. I can tell       that he can be very effective if he is left alone in supporting overall economic policies of the Bush Administration. He is very     good in engaging the audience.

The other relates to a comment by Powell, who is the Secretary of the U.S. State Department, regarding his preference for a    continuing dialogue with the North Korea that was reversed the next morning by President Bush himself who put further          negotiations with the North on hold.

Hopefully advisors inside the White House understand that matters in reality are rarely all right or all wrong and that the best way of handling the North is to continue efforts that will help opening the North to the rest of the world. Isolating the North benefits no one.

At present, the best approach for business and political leaders in Korea toward working with the new Bush administration is to be patient and continue to work with such competent secretaries as O'Neill and Mr. Powell since President Bush will eventually  have to listen to these intelligent public officials. []

Harbinger of US-NK Economic Relations

By Prof. Chang Se-moon
University of South Alabama

MOBILE, SOUTH ALABAMA -- Early in March, several officials from the North's Ministry of Foreign Trade and Ministry of Finance toured major cities in the U.S. at the invitation of a group of private organizations.

Although government officials in the South dismissed the event as being insignificant, I think it is an important development that policymakers and business leaders in Seoul need to pay attention to.

The point is that it is not an isolated event, but the harbinger of the North's attempt to promote direct trade with the United States.

The following are the major developments of recent years in the relationship between North Korea, South Korea and the U.S. (in chronological order):

The Perry Report on the North's missile tests and diplomatic relations with the U.S. (September 1999); historic summit between President Kim Dae- jung and North's leader Kim Jong-il and their joint declaration (June 2000); U.S. lifting of economic sanctions against the North (June 2000); first reunions of separated families (August 2000); joint march-in at the opening ceremony of the Sydney Olympics (September 2000); bestowment of Nobel Peace Prize on President Kim Dae-jung      (September 2000); visit to the North by U.S. Secretary of State Madeleine Albright (Oct 2000); and the visit by Jo Myong-rok, special envoy to the North's Kim Jong-il, to the U.S. for promotion of economic cooperation between the two nations (Oct 2000).

Let us focus on the June 2000 lifting of economic sanctions by the U.S. against the North that had existed since 1950.

On September 17, 1999, then-president Clinton announced his decision to ease economic sanctions against North Korea in order to improve overall relations with the North, support the Agreed Framework in the Perry Report, and encourage the North to continue to refrain from testing long-range missiles.

Effective June 19, 2000, the Office of Foreign Assets Control amended the Foreign Assets Control Regulations, 31 CFR part 500, adding Sec. 500.586, authorizing new transactions involving property in which North Korean nationals had an interest. The new rules were further clarified by the Office of Foreign Assets Control on August 18, 2000.

The new rules permit sales by U.S. firms to the North by allowing exports and re-exports to, new investment in, and                brokering transactions with North Korea, provided that these are licensed and authorized by the U.S. Department of Commerce and the Export Administration Regulations.

The new rules permit imports of products produced in North Korea but require approval from the Office of Foreign Assets Control and should comply with Chapter 7 of the Arms Export Control Act.

Those seeking to import products from North Korea into the United States must submit all available information on the
importer (name, address, telephone number, fax number, and e-mail address of the importer); a description of the product to
be imported, including quantity and cost; the name and address of the producer; the name of the location where the product was produced; and the name and address of the North Korean exporter.

Requests for import review should be submitted for approval by mail to the North Korea Unit, Office of Foreign Assets Control
(OAFC). U.S. depository institutions handling letters of credit or documentary collections involving imports from North Korea
must obtain a copy of OFAC's approval letter from the importer before proceeding with such transactions. The letter must also
be provided to the U.S. Customs Service before imports from North Korea are allowed into the United States.

The new rules also allow U.S. citizens to travel to North Korea by stating that U.S. passports are valid for travel to North     Korea and individuals do not need U.S. government permission to travel there. U.S. travel service providers are authorized to
organize group travels to North Korea, including transactions with North Korean carriers.

One organization outside Korea has already started advertising a group tour to the North in response to the lifting of the         sanctions against the North. The organization, called Koryo (Group) Tour, is an unknown tour company although it claims to   have been in the tour business since 1993.

A key question relates to the long-term impact of the new rules on businesses in Korea as well as Korean businesses in the
United States..

The new rules are expected to provide new opportunities in North Korea for U.S. firms, businesses owned by Korean-Americans, and importantly, for U.S. branches of Korean businesses. This means that businesses in Korea will have to be, more aggressive in developing business ties with the U.S. as well as opportunities in the North in conjunction with operations in the United States.

Importantly, the new rules will lead to a greater presence of North Koreans in the United States and pose a new challenge to
Korean diplomatic offices as well as numerous Korean associations based in the U.S.

The March visit of North Korean officials to the U.S. cities appears to be the first of many such attempts by the North to
bypass the South and trade directly with the United States. [] * Professor Chang is a member of The Korea Times Economic Editorial Board. He is a professor of economics and director of the Center for Business and Economic Research at the University of South Alabama. Chang was president of the Korea-American Economic                       Association (KAEA) in 1999 and president of the Association for University Business and Economic Research (AUBER) in 1999. AUBER is a national association of business research centers in the U.S. with a membership of 120 universities-E.D.

Money for Unification

By Prof. Chang Se-moon
University of South Alabama

MOBILE, SOUTH ALABAMA -- A recent article in The Korea Times described how illegal campaign funds were distributed through the Agency for National Security Planning to about 200 candidates of the then ruling New Korea Party during the 1995 local and 1996 general elections.

This article reminded me of the international conference on Korea's unification issues that the Korea-America Economic Association (KAEA) organized in October 1999 in Washington D.C. when I was KAEA's president.

KAEA is an association of economists who were born in Korea and now work in the United States mostly as professors and government officials.

Unification of the two Koreas is truly a complex issue, raising numerous questions. These questions include: How to consolidate governmental bureaucracy? How to pay for the North's foreign debts? Should there be a complete amnesty for the North's political leaders? How should the South handle a potential mass migration to the South? What about the resentment by those in the South forced to make a greater sacrifice? How should the land in the North be distributed? What should the South do if the North's leaders give away land to their friends and relatives? How should the South's constitution change after unification? Should the South's constitution be expanded as West Germany and North Vietnam did? Should the constitutions of both Koreas be abandoned and a new one prepared as in the case of Yemen?

What about the North's currency? Should the South be generous by exchanging the same amount of South Korean currency for the North's currency? How will such policy affect the public support for unification, let alone the burden of taking over the North's foreign debt by the South?

How will the conversion rate affect future exports of products produced in the North? What if the North prints a large amount of money shortly before unification? Should the South still convert all of the North's currency to the South's won?

The North is a poor country. The U.N. World Food Program has spent more than $600 million since 1995 and now feeds 1 out of every 3 North Korean people. Many people in the North who are around or older than 50 years old die of lung and liver cancer.

More than 2 million people have perished since 1995 due to hunger. The growth rate of the North's economy from 1990 to 1999 averaged minus 4.3 percent, while the growth rate of the South's economy during the same period averaged 6.2 percent, including the negative growth in 1998.

Somalia, Afghanistan, Burundi, Eritrea, Haiti, Congo, and Mozambique are the only nations that are believed to be poorer than North Korea.

Unification with the poor North requires money. How much money is needed depends on how the two Koreas are unified as well as post-unification policy objectives. Estimates vary from $150 billion for a sudden unification to as much as $700 billion for a gradual unification.

In a recent article in The Korea Times, Noland states that "transfers of $300 billion to $600 billion would be necessary over a period of ten years, to raise the level of North Korean per capita income to 60 percent of the South's, a value conventionally thought to choke off the incentives for mass migration.''

Unification requires a large sum of money. I suggest that the South establish a trust fund for unification. A credible unification fund with billions of dollars will help boost public support for unification.

Keep in mind that as the North is forced to widen its open door policy, events such as an uprising in the North may force the South to accommodate unification sooner than it plans or even wishes.

Does the South really want unification after the North's economy has fully grown, forcing the South to share all the post-unification political power? I doubt it.

Although scholars, public officials, and everyone supporting the cause can explore the sources of the unification fund, I suggest that we start with two sources.

One is an increase in airport usage fee levied on all international passengers flying in and out of Korea. The idea is to force anyone who benefits in any way from having a relation to Korea to pay for unification.

The other is to collect and save all civil fines levied on those found guilty in Korea. As of July 31, 2000, there were no less than 91 persons who owed at least $1 million each.

The list includes former president Chun Doo-hwan, who still owes nearly $200 million, former president Roh Tae-woo, who has yet to pay an additional $80 million, and Kim Jong-uhn of Shindongah group who owes about $200 million. Who knows how much of the $100 million that the Agency for National Security Planning arranged for pro-government candidates will have to be returned? []

* Professor Chang is a member of The Korea Times Economic Editorial Board.

Financial Crisis & Firewall

By Prof. Chang Se-moon
University of South Alabama

MOBILE, SOUTH ALABAMA -- The annual meeting of the Allied Social Science Associations was held on January 5-7 in New Orleans.

There were two special sessions on the 1997 financial crisis: ``Asian Crisis and Recovery: Lessons Learned'' and ``Revisiting Financial Crises: Global and Regional Perspectives.'' There were presentations by researchers from Columbia University, Cornell University, Stanford University, the Federal Reserve Board and United Kingdom, among others. This article is a summary of their presentations.

The 1997 financial crisis was unique in that its onset was abrupt and its victims were among the most vigorous economies. The path of the crisis was random and included, in order of occurrence, Prague, Bangkok, Kuala Lumpur, Jakarta, Brasilia, Seoul, and Moscow.

The growth rates in 1998 were negative for Hong Kong (-5.3 percent), Indonesia (-13.0 percent), Korea (-6.7 percent), Malaysia (-7.4 percent), Philippines (-0.6 percent), and Thailand (-10.2 percent).

The 1998 growth rates were positive for Singapore (0.4 percent), Taiwan (4.6 percent), and China. China had strong current accounts as well as capital controls that limited influx of foreign debt.

Even if China did not experience the financial crisis in 1997, presenters pointed out that China does not offer a blueprint for avoiding future crises.

This is because the Chinese economy lags behind other Asian economies.

Contrary to many beliefs, cronyism was not the cause of the crisis. The crony capitalism hypothesis of the 1997 crisis refers to the proposition that something was wrong internally in, say, subsidizing industries that had no comparative advantages, and that the crisis would have happened without the external shock.

If crony capitalism was the cause of the crisis, presenters claimed that recovery would not have come so quickly. In Korea, they pointed out, the government promoted all export industries, not just selective crony industries.

Others, notably those of the Federal Reserve Board who are working on an early warning system for possible future financial crises, suggested that domestic factors contributed to much of the underlying vulnerability of emerging market economies, however, adverse swings in external factors might have been important in pushing these economies over the edge and into the financial crisis.

The real cause of the 1997 crisis, according to some, was private debt that satisfied non-economic objectives of political leaders. Malaysia built the Petronas towers for the sake of building the world's tallest buildings; Suharto stressed the civilian aircraft industry to follow the path of Japan; and former President Kim Young-sam postponed depreciation of the Korean currency to keep Korea's GDP per person from falling below $10,000 when converted to the U.S. dollar. The private debt hypothesis has had strong support among economists. It explains Korea's 1997 financial crisis as follows.

Prior to the 1997 crisis in Korea, the nominal exchange rate was about 800 won to the dollar but the real exchange rate was about 1200 won per dollar. In other words, the market exchange rate should have been allowed to float to the 1200 won level, but was kept at 800 won.

When Korean businesses borrowed money from other countries, all they had to pay was 800 won, not the real cost of 1200 won, for every dollar they borrowed.

This means that foreign loans were cheap and Korean businesses borrowed more than they should have borrowed. When lenders felt worried about too much borrowing by Korean businesses, they made the loans mostly short-term hoping that they could get their money back before something bad happened.

When short-term profits were not large enough to cover short-term debt obligations, more borrowing was needed to make payment on these earlier debt obligations. When lenders were not willing to cover the short-term cash flows that were needed to make payment on their own loans, a major financial crisis unfolded.

Unfortunately, the crisis was resolved through a full-blown financial crisis that required IMF assistance rather than a gradual reduction of short-term foreign debt based on discrete policy decisions.

One problem the Korean economy is facing now relates to public support for globalization that decreased after the 1997 crisis. Public consensus for support of continuing globalization of the Korean economy is essential to sustain its growth.

Overall, lessons learned from the 1997 crisis include the importance of (a) a reduction of short-term foreign debt, (b) an increase in foreign reserves, (c) establishment of a cooperative Asian currency stabilization fund, (d) no excess leverage, and (e) a close monitoring of any excessive speculation on hedge funds.

Korea, like all other emerging market economies, wants a firewall that can protect itself from adverse external shocks. What is clear from the experience of the 1997 financial crisis is that an arbitrary intervention in the foreign exchange market cannot be a firewall because too much information is lost for effective policy making when exchange rates are not allowed to float freely. ( )

Slowing Economy Ahead

By Chang Se-moon
Professor of University of South Alabama

MOBILE, SOUTH ALABAMA -- As recently as October 2000, economists had predicted the U.S. economy to grow by 3 percent to 3.5 percent in 2001 and the Federal Reserve Board to raise the discount rate at least one more time to counter inflation.

During the past 60 days, however, the projected growth rates of the U.S. economy during 2001 were lowered to around 2.5 percent and the Fed cut interest rates on January 3.

What is going on? Economic indicators released during the 60 days certainly point toward a slowing economy. From the second quarter to the third quarter of 2000, the annual growth rate of the U.S. real GDP slowed from 5.6 percent to 2.2 percent; the growth rate of corporate profits declined from 2.9 percent to 0.7 percent; the rate of unemployment increased from 3.9 percent to 4.0 percent; and the annual growth rate of labor productivity slowed from 6.1 percent to 3.3 percent.

U.S. savings rate has been falling, while the consumer debt has been rising. Lately, yields on the short-term Treasury bills have surpassed yields on the long-term Treasury notes and bonds, showing an inverted yield curve that has been associated with past recessions. Note that long-term interest rates are usually higher than short-term interest rates because of hedge against inflation.

In addition, the New York-based Conference Board composite index of leading indicators peaked at 106.3 in January 2000 and then declined in February, March, July, August, October and November in 2000 to 105.3. The index gained 1.5 to 2 percent annually during the three previous years. In many regions, retail sales slowed to a halt beginning from late spring of last year.

It is no wonder that a recent survey conducted by the Korean Employers Federation showed CEOs of major enterprises in Korea worrying about a possible economic crisis this year with plans to lower new capital investments.

It is also no wonder that officials of the Ministry of Finance and Economy projected a slowdown in the Korean economy early this year when a package of expansionary policy measures were unveiled for this year.

Keep in mind that Korea is the sixth largest importer of U.S. products and the U.S. is the eighth largest importer of Korean products.

No one knows whether the slowdown of the U.S. economy will end through a hard landing with a short-term recession and a rising rate of unemployment or a soft landing with a temporary slowdown.

Many forecasting groups still predict a soft landing, suggesting that the slowdown of the U.S. economy would not last long. Although the negative wealth effect from falling stock prices will continue to adversely affect the economy, the continuing growth of the information and information processing technology, the trend toward a greater globalization, and last week's cut in U.S. interest rates are expected to make the slowdown relatively short.

Regardless of whether the U.S. economy recovers through a soft landing or a hard landing, the impact of a slowing U.S. economy on Korean businesses are clear.

Demand for Korean products in the U.S. will be lower. Mostly likely, the demand may have been slow since the middle of last year and will continue to be slow at least during the first half of this year.

There may be exceptions in what may be called Wal-Mart varieties that are low-priced quality substitutes such as Korean automobiles.

A falling value of the Korean currency against the dollar in recent months would counter the slowing U.S. demand for Korean goods to some extent. There are reports indicating the preference among president-elect Bush's policymakers for a weaker dollar, however.

What should businesses in Korea do? First of all, businesses need to re-evaluate the amount of inventories that they plan to carry. When an economy slows down, the needs for inventories also decrease because there is less demand. Excess inventories can be costly and are one of the major reasons why many businesses have failed during the early stages of an economic slowdown.

Secondly, pricing policies need to be re-examined. Slow economies rarely affect discount stores such as Wal-Mart, K-Mart, and Target Stores.

Thirdly, an extreme confrontation needs to be avoided. Workers need businesses for their employment and businesses need workers for there existence. Once a business is closed even for a short period of time, it loses customers. It is always more expensive to attract new customers than to keep current customers.

Businesses and workers need each other more than they think they do.

Finally, the emphasis may have to be placed again on fundamental business economics in such areas as searching for new markets, avoiding costly litigations, understanding U.S. communities for long-term stay, and obtaining information that can help Korean firms in making better decisions for global competition.

These topics as well as issues of the unification will be addressed in this column for the rest of this year. The spirit of the Korean people that created the miracle on the Han River will be tested during the next several months although not as severely as it was in 1997. []

Chang is a member of the Korea Times Economic Editorial Board. He is a professor of economics, and director of the Center for Business & Economic Research at the University of South Alabama. Chang was president of the Korea-America Economic Association (KAEA) in 1999, and president of the Association for University Business and Economic Research (AUBER) in 1999. AUBER is a national association of business research centers in the U.S. with about 120 universities as its members. -E.D.

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