The Korea Times Articles - 2002
To Become Successful President
by Chang Se-moon
University of South Alabama
Dear President Roh Moo-hyun,
I sincerely congratulate you on being elected as Korea's next president in a fair and competitive voting process. It is my hope that all of us inside and outside the country who are concerned about the future of Korea will give you full and complete support for your success as president. I know you can do it because you overcame numerous adversities, including difficulties during your work as a human rights lawyer in the tough period of military rule.
I also want to make some suggestions for your success because support for your policies depends on how you manage state affairs. Please understand that it is you, only you, who can determine how much public backing you can generate.
Most importantly, please set aside time on your own so you can think through all the important decisions. You need quiet time to think, think and think again, and focus on a few critical issues that will have a long-lasting impact on all Koreans, regardless of whether your decisions are popular or not.
Secondly, you should truly believe in the importance of freedom of the press, because without it, there is no democracy. It is not a pleasant experience to be criticized by the news media, especially when news reports do not seem fair.
But remember that you were elected as president because freedom of the press enabled the reporting of your views to the general public. Media criticism is part of a political life. Do not take it personally. Just pursue correct policies and enjoy media criticism. The media always criticizes people who are successful like you.
Thirdly, I am especially happy that you were elected because you have fought in the past for those people who were neither rich nor powerful. It is important to hold onto that spirit and make laws applicable to everyone, whether rich or poor. You should not enrich yourself, nor dramatize the nation's legal system as presidents have done in recent years.
If someone is found guilty for illegally enriching themselves, you should at least make sure that they repay every won that they took. If the law says all young men should serve in the military, do not make an exception. Send all young men to the military if they are healthy, and to alternative community service for the same length of time if conscription is prevented by health problems. If there are more young men than needed by the armed forces, simply reduce the length of required service but make sure that everybody fulfils his or her obligation.
Also, all pending allegations of improper handling of public funds need to be thoroughly investigated and dealt with according to the law, with no consideration of friendship, seniority or past practices.
Fourthly, I am happy to hear that you promised to boost the market economic system during your post-election news conference. Unfortunately, the economy does not always behave as we want it to behave. Sometimes it works in such way that good intentions lead to opposite results. For instance, when the U.S. congress passed a law expanding benefits to mentally ill schoolchildren, more parents wanted to have their children classified as being mentally ill.
It is not easy to understand the market system. One key requirement to having a free market system is the existence and strong enforcement of rules and regulations that apply to all businesses. Beyond the basic rules and regulations, however, firms should be left alone and be allowed to compete freely. Decisions such as closing some businesses that are deemed having little future prospects are the roles that the market, not the politicians, should play. Please understand that failure is part of the free market system.
In your post-election news conference, you vowed to narrow the widening income gap between the rich and the poor. You should. You also promised to make concerted efforts to bring inflationary pressure under control and pursue an annual growth rate of 7 percent. This is not an easy task because, for instance, lowering inflation rates may lead to more unemployment. Further, transparency in chaebol is important, as you stressed, and has to be achieved, but it is also important to realize that small businesses can hardly survive global competition.
To create jobs and raise income, the only realistic thing you can do is to promote an environment in which businesses can compete and grow, again bringing us back to fair rules and regulations. Jobs should be created by the private sector, not by the government.
Fifthly, I fully support your determination to continue President Kim's sunshine policy. The policy was brilliant and opened the door for a dialogue between the two Koreas, which many thought was impossible.
However, please consider that there is a cycle for everything, and the sunshine policy needs to move to its second stage. The objective of the policy's first stage was to open a dialogue. By all indications, this objective has been achieved, to President Kim Dae-jung's credit. The objective of the second stage of the sunshine policy should be to build the foundation for a permanent peace based on mutual growth.
To build the foundation for a permanent peace, you need to be patient, and leaders of North Korea have to be more honest and straightforward in dealings with the South. If the North is not willing to ease military tension as part of the sunshine policy, you need to go slow. In view of the latest developments on the North's nuclear policy, it is clear to me that you have no choice but to go slow and work closely with President Bush. I do not believe anyone knows the best way to handle the North at this juncture. All I know is that you need time, probably lots of time, to think alone.
Finally, I will touch on the sensitive subject of anti-Americanism that became increasingly conspicuous following the June 13 accident in which two 14-year old schoolgirls were crushed to death by a 45-ton U.S. mine-clearing vehicle during a training exercise.
I suggest that you, or President Kim in cooperation with you, appoint a special commission of fair-minded persons.
The commission should gather all pertinent information on U.S. Status of Forces Agreements with other nations. The information needs to include how these agreements handle incidents involving on-duty vs. off-duty U.S. military personnel. The commission should then compare all these individual agreements with the existing SOFA between the U.S. and Korea. Finally, the commission should consider the SOFA that Korea maintains with nations in which Korean peacekeeping forces are stationed. My understanding is that Korean military personnel are in such places as Kyrgyzstan, East Timor, and Afghanistan. Whatever concessions Korea demands from the U.S. need to be consistent with agreements that Korea maintains with those host nations.
By this time, areas for negotiation and possible improvement of the existing SOFA will emerge and the public will have to accept whatever comes out of this review.
I fully agree with claims by Korean business groups in that the anti-American sentiment will eventually hurt the Korean economy in more ways than the general public may realize. Further, the nation needs to be focused on the North's continuing threat.
Unless the anti-American sentiment is resolved soon, parents of U.S. soldiers stationed in Korea as well as other ordinary Americans will start writing letters to their congressmen demanding the withdrawal of the U.S. troops from Korea. Keep in mind that a decade ago, when anti-American sentiment was allowed to escalate, the U.S. withdrew its troops from the Philippines. If the U.S. troops withdraw from Korea, the uncertainty involving the North's threat will definitely slow the growth rate of the Korean economy, if not jeopardizing Korea's national security.
I have no doubt that you will be a good leader. Good leaders are not always
popular, but lead the general public toward the correct path. I wish you great
success in your presidency.
Korea's 1997 Crisis through the Rearview Mirror
By Chang Se-moon
University of South Alabama
In retrospect, several factors were working against the Korean economy prior to the 1997 crisis, although it was not clearly understood at the time just how serious these factors were. For one, the Chinese economy had been growing at an annual rate of more than 10 percent a year between 1980 and 1996, fueled primarily by exports of manufactured goods that grew even faster at an annual rate of more than 20 percent between 1990 and 1996. Chinese firms competed directly against Korean firms in what may be called low-wage industries such as textiles and apparel. Korea was forced to focus on development of high tech industries such as electronics, semiconductors, automobiles, and biochemicals, thus competing against Japanese firms. In other words, Korea was competing against China and other Asian nations in low-wage industries, while competing against Japan and other advanced nations in high-tech industries in the 1990s.
In January 1994, China devalued its currency by 50 percent, while the Japanese yen progressively depreciated against the U.S. dollar: from 85 Yen to the dollar in June 1995 to 127 Yen to the dollar in April 1997. This further eroded the competitive position of Korean exports, making exports from China and Japan that much cheaper than exports from Korea.
There were some ominous signs for the trouble brewing also within Korea through, for instance, failures of Hanbo in January 1997 and Kia in August 1997. Soon after the Hanbo's bankruptcy in January, new medium- to long-term loans to Korean businesses were drying up fast. The significance of these red flags may not have been taken seriously. In August 1997, the Korean government was reported to have committed $500 million to the IMF rescue plan for Thailand, unaware of the impending crisis of its own. Korean government bonds were downgraded to near a junk bond status in September 1997. By now, soft landing was beyond the grasp of Korea's policymakers. The only question that remained was how hard the landing was going to be in terms of economic growth, job losses and other economic indicators.
On November 21, 1997, Korea's Finance Minister announced that the government was officially seeking an IMF rescue package. The crisis eventually caused one in every 20 Korean workers to lose their jobs, and the poverty rate more than doubled from 3 percent to 7.5 percent. Ironically, the Briefing Notes Number 16 of the Asian Development Bank states that the income share of the rich has increased from 22 percent to 24.5 percent in Korea immediately following the crisis. Less than two years before the announcement, Korea was cited as an exemplary case of the Asian Miracle by the World Bank, and was ranked as the 5th best place in the world to invest by the World Economic Forum.
The crisis has been discussed in many different contexts such as (a) the structural weaknesses hypothesis of the Korean economy that underwent numerous structural reforms after the crisis, (b) the moral hazard hypothesis claiming that the cause was an excessive borrowing under an implicit guarantee of the loans by the crony capitalistic government, (c) the cash flow or credit crunch hypothesis which claims that there was nothing seriously wrong with the Korean economy and the crisis was due to temporary shortages of cash flow or credit availability, and (d) the contagion hypothesis from the drastic devaluation of the Thai baht in July 1997 that adversely affected Korea's exports and alarmed foreign lenders to Korean businesses for the possibility of a similar crisis.
All these theories explain at least part of the reasons why the crisis hit the Korean economy in 1997. To simplify discussion, however, I would like to focus on the government policy on foreign exchange rates, measured in won against the dollar.
The purchase price of the dollar in Korean currency was 854 won on January 3, 1997, but increased to 979 won on November 1, to 1,081 won on November 21, and to the highest level at 2,067 won on December 23 all in 1997. About a year later, the purchase price fell to 1,230 won on December 30, 1998, which is close to prevailing exchange rates these days.
The point is that the Korean currency was over-valued by as much as 40 percent when the crisis was looming on the horizon early in 1997. The nominal exchange rate was too low at 854 won on January 3, 1997 when the competitive rate should have been higher at about 1,200+ won.
Three questions merit examination. What were the effects of the strong won prior to November 1997? Why was the exchange rate kept so low? What role did the strong won play in causing the 1997 crisis?
The strong won means that the Koran currency was arbitrarily appreciated. Using economists' jargon, the low nominal exchange rate as measured in won per dollar effectively lowered the real exchange rate, appreciating the Korean currency. The effects of the appreciated Korean currency were (a) reduced exports of Korean products causing deficits in current account, (b) lower prices of imports keeping domestic inflation rates low, and (c) cheap loans that increased borrowing by Korean firms from overseas lenders and concurrently made the balance of payments rosier than what it actually was.
The low exchange rate was the policy of the Korean government. The government maintained the strong won policy based on the "market average foreign exchange rate system" which, adopted in1990, allowed the exchange rate to move within the narrow daily fluctuation band. The Korean government maintained the strong won policy partly to keep inflation rates low, partly to keep the domestic currency costs of servicing foreign debts low thus in effect encouraging Korean firms to continue to borrow from overseas, and allegedly to maintain the per capita personal income at least at $10,000, which would not have been possible when converted to the U.S. dollar at competitive exchange rates. Joining the OECD in 1996 also made the job of maintaining the Korean currency strong easier because OECD funds flowed into Korea to take advantage of Korea's high interest rates.
In plain English, the job of arbitrarily maintaining the nominal exchange rate low at 850 won to the dollar rather than at, say, 1,200+ won to the dollar was made easy not because exports increased, but because more money was borrowed from overseas. Koreans felt rich with borrowed money.
What role did the strong won play in causing the 1997 crisis? So long as the Korean currency was kept arbitrarily strong, Korean firms kept borrowing money from overseas. When the borrowing was prompted by the low exchange rate rather than increasing exports, lenders began suspecting the ability of Korean firms to repay the debt. This concern led foreign lenders to make the terms of their loans shorter and shorter. As of the end of November 1997, Korea's external liabilities under the new classification reached U.S.$ 156.9 billion, of which short-term liabilities accounted for 58.8 percent ($92.2 billion) of the total, representing an increase from the low 40s percent in the early 1990s. Interestingly, over 70 percent of these external liabilities are believed arranged through Korea's financial institutions, assuring that these financial institutions would be hit by the brunt of the crisis when it finally arrived. The march toward a greater share of short-term loans was clearly a red flag that policymakers in Korea shied away from.
When speculative attacks on the Korean won began in October and accelerated in November of 1997, the Korean government tried to defend its currency by selling foreign exchange reserves, rather than floating the currency. When Korea's foreign exchange reserves reached the verge of a debt moratorium, Korea had little choice left except calling for help from the IMF on November 21. With numerous and successful structural reforms since the 1997 crisis as well as the adoption of the floating exchange rate system, chances are greatly reduced to encounter a similar crisis in the near future.
The speedy globalization of the world economy since 1997, increased terrorist
activities since 2001, possible military conflict in Iraq, and looming financial
crisis in Japan and Brazil, however, may bring a new danger yet to the Korean
economy. It seems important for new leaders from the coming presidential
election to pursue policies that are fundamentally sound and can play the role
of an economic firewall that can protect the Korean economy from possible new
shocks from overseas.
My Choice of the Korea's Next President
By Chang Se-moon
University of South Alabama
With three strong presidential candidates in Chung Mong-joon, Lee Hoi-chang,
and Noh Moo-hyun, voters are faced with a complicated political picture less
than a month out from the election.
In addition to the main candidates, there are several others representing smaller constituent groups.
All these candidates have made so many positive policy statements on so many different occasions that I am not even sure what the main differences between them are.
We may also recall that, while none of the past presidential candidates made campaign promises to personally enrich themselves or assist their sons and relatives to steal money, they all did. This all makes for voter confusion.
Still, I have made my choice. But, before I tell who it is, I will describe several policies I would like to see them carry out.
First, I want the next president to truly believe in the free market system. One key requirement of having a true free market system is the existence and strong enforcement of rules that apply to all businesses. These rules should include protections for consumers and the rights of minority stockholders, tough inheritance laws, the abolition of insider trading, transparent governance, reduction of pressures on interlocking decisions, and so on.
Beyond the basic rules and regulations, however, businesses should be left alone and be allowed to compete. Decisions, for example, on closing businesses that are deemed to have poor future prospects, should be left for the market _ not politicians _ to make. Failure is part of the free market system.
The alleged transfer of $400 million to North Korea through a subsidiary by a Chaebol may be one example where such rules and regulations would come into play. To me, it is a non-issue. Such a transfer without the agreement of the Korean National Assembly has to be a legal violation. Those who violated laws should be identified and punished to the fullest extent of the law, ignoring any possible positive impact the transfer may have had on the unification movement. Another example might be real estate bubbles. Real estate bubbles are inevitable in societies with high population density. All the government can do is make its policies transparent and fair so that everyone has an equal opportunity.
I also want the next president to be watchful of the development of multinational trade areas. Regional free trade areas are increasingly important. The absolute bottom line is that South Korea should not be left out of any new free trade area that could adversely affect its competitive status in global trade. It is not clear what free trade agreements may emerge involving Korea. Japan, China and the U.S. are the natural starting point, which can easily be extended to include NAFTA nations, European Community, and ASEAN nations.
Negotiations on free trade areas are inevitably political in tone and involve complications. I do not believe that anyone has a clear picture at this juncture how an agreement involving Korea should be organized, but Korea needs to be prepared.
I want the next president to have empathy for the poor and the powerless. I am pleased that some leading candidates proposed establishing a government watchdog to eliminate various types of social discrimination. Developing a policy of non-discrimination will not be easy, however. Discrimination based on gender, age, disability and regionalism should be abolished. Alleged discrimination based on academic background may not be a simple issue since academic background may influence a person's competence.
It is interesting that leading candidates have promised to create millions of jobs, achieve 100 percent employment, or raise per capita income to $25,000 in ten years. Unfortunately, the economy does not always behave as we want it to. The government may develop a plan to act as the employer of last-resort by enrolling unemployed persons into public work projects at minimum wages. But, other than this, jobs are created by the private sector. This is especially true for high-paying jobs. Realistically, all that the next President can do to create jobs and raise income is to promote an environment where businesses compete and grow, again bringing us back to fair rules and regulations.
I want the next president to continue to support the "sunshine policy," but with patience. If North Korean leaders were honest and straightforward in dealings with the South, financial support for the North might merit serious consideration. When the North's leaders play games, as they have been doing with their nuclear weapons program, the first priority must be national defense, with the unification becoming the second priority.
It is impossible for the North to return to its evil ways of the past. North Korean leaders will respond to the South's overtures of peace for their own self-interest. South Korea needs to pursue a more patient sunshine policy. It also needs to establish a unification fund to cope with the cost of dealing with a potential surge of refugees from the North.
Leading candidates have also touched on the idea of relocating the government to the Daejon area. In old days, the idea was suggested for defense against a possible attack from the North. These days, the idea appears more for economic reasons than for national defense. As a specialist in feasibility and impact studies, I can testify to the importance of conducting a feasibility study before any such decision is made. Benefits may or may not outweigh costs when economic, military, social, and cultural factors are considered. I know there are some excellent research organizations in Seoul that can conduct such studies. The next president should give the move serious consideration and undertake a feasibility study.
I want the next president to reduce the length of Korea's mandatory military
service to less than two years and make those who fail, or allegedly fail, to
qualify for military service perform community service for the same period. This
will make the system fair and get rid of incentives for sons of the rich and
powerful to avoid the military service.
I want the next president to be one who has the capacity to think deeply, feels the pain of the poor and weak, and has enough character to stay above the rampant and deep-rooted corruption that has plagued past presidents. I want the next president to take Korea seriously rather than use Korea as a tool to get rich and enjoy themselves. I want the next president to keep high-profile criminals in prison for the entire length of their sentence, rather than showcasing and releasing them as if the Korean justice system were a toy to play with.
I seriously doubt that any of leading presidential candidates will be able to satisfy all these qualifications, in part because they have benefited from the current system and, in part, because the social and political culture will not allow them to pursue all these policies even if they wanted to.
Still, one candidate appears more qualified than others. Unfortunately, I
have run out of space to tell you who it is.
Southeast US-Korea Economic Conference
By Chang Se-moon
University of South Alabama
On Nov. 3 and 4, the 16th Annual Conference of the Southeast U.S. (SEUS) - Korea Economic Committee was held in historic Savannah, Georgia. The meeting site alternates each year between Korea and one of the seven Southeast U.S. states. The seven member states of the SEUS-Korea Economic Committee are, in alphabetical order: Alabama, Florida, Georgia, North Carolina, South Carolina, Tennessee and Virginia. The conference is designed to promote trade and investment between SEUS states and Korea.
This year’s conference was no exception in that hundreds of delegates from Korea and SEUS states attended the conference for information exchange and networking. Organizers in Korea as well as SEUS states have done an excellent job in making the conference worthy of serious attention by potential exporters, importers and investors from both countries. Key officials of the Korean group are Mr. Kim Jae-chul, who is the chairman of the Korea-U.S. Economic Council, and Mr. Ryu Jin-roy who is the chairman of the Korea-Southeast U.S. Economic Committee.
There were two speakers in the panel session on mutual investment. One speaker from Korea made a presentation on why the SEUS states should invest in Korea, and the other speaker from SEUS states made a presentation on why Korea should invest in SEUS states. I had the honor of being the other speaker, representing the seven SEUS states. In the remainder of this article, I would like to summarize the presentation that I made during the conference.
The relation between Korea and SEUS states is very close in that the amount of total exports from SEUS states to Korea was $1.6 billion in 2001. The largest exporting state was North Carolina ($423 million), followed by Florida ($259 million), Georgia ($239 million), Virginia ($212 million), Tennessee ($199 million), Alabama ($127 million), and South Carolina ($117 million).
There are many Korean companies successfully operating, and about to operate, in these states. Korean companies in Alabama include Hyundai Motor, Kudzu, LG, OCI Chemical, and United Douglas Pharm. Korean companies in Florida include Kyung-Gi Floriculture, Vx Corp., OneClick Technologies, Dada, Daelim, Daewoo, Hanjin Shipping, Hankook Sewing Machine, Inko Headwear, Kia Motors, LG Electronics, Korean Sewing Machine, New Star, Sunstar, Samsung Electronics, Samsung Telecommunications, and more. Georgia’s Korean companies include Daewoo Heavy, Daewoo Motor, Hanjin Shipping, Kia Motor, Korean Air, SKC America, and USI.
Korean companies in North Carolina include Custom Molder, Daedong-Kioto, Hyosung, Kisco, and LG Electronics, while Korean companies in South Carolina include Kiswire, Peace Textile, and Silstar Corp. Korean companies in Tennessee include Hanjin Transportation, Hyundai Elevator, Hyundai Merchant Marine, Kumho Tire, Samlip, and Samsung Electronics, while Korean companies in Virginia include Ableclick, Cintel USA, Cho Yang, Handysoft, and Uriel Systems.
Why should Korea invest in SEUS states? Consider that SEUS states are gateways to the growing South and Central American markets (Alabama & Florida); the busiest trade routes to European countries (Georgia & South Carolina); the new automobile alley (Tennessee, Alabama, Georgia & South Carolina); high tech research areas (North Carolina & Virginia); areas for cutting edge medical research (Georgia & Alabama); unique tourism attractions (all seven states especially Florida & Virginia); transportation hubs (Georgia); regions for space technologies (Alabama & Florida); and have relatively low manufacturing wages.
In addition, the combined population of SEUS states increased by 19.7 percent from 1990 to 2000, while the population of the entire U.S. increased by 13.2 percent during the same period.
Incidentally, major automobile assembly plants in SEUS states are: Mercedes Benz, Honda and Hyundai in Alabama; Nissan, Peterbilt and Saturn in Tennessee, Ford, General Motors and Daimler-Chrysler in Georgia, BMW and Mack in South Carolina; Volvo in North Carolina; and Freightliner in Virginia.
When Korean businesses look for a site or a building in other countries such as SEUS states, these businesses usually have a checklist for site selection. Broadly speaking, the checklist includes amenities, business climate, financial arrangement, labor costs, land costs, transportation costs, and personal contact. Frequently, host countries offer investment incentives to attract Korean businesses. These incentives match or satisfy many items on the checklist that Korean businesses go through.
Understandably, state and local assistance in SEUS states varies greatly across individual states in terms of the type of the project, the size of the project, products to be produced, and by the state and local area involved. However, SEUS states are known to be most competitive in providing investment incentives.
Possible incentives in the buildings and sites category include the availability of a wide variety of buildings and sites at reasonable prices, site preparation, water & sewer improvements, and possibly a fire station. Incentives in transportation include improvements of local roads, access roads to interstate highways, easy access to air & port resources, and rail extension. Incentives in worker training are comprised of customized training facilities and state-of-the-art equipment. Public utility industries also provide numerous incentives including the easy availability of electricity, natural gas improvements, and advanced telecommunication systems.
There are numerous tax incentives also. These incentives may take the form of abatements or credits against property tax, sales tax, franchise tax, inventory tax, mortgage records tax, and local building permits. These incentives may also take the form of tax credits in investment tax, job tax, R&D expenditures, and childcare expenses.
There are other miscellaneous incentives in advertising, housing assistance, a foreign trade zone if appropriate, and even a subsidy to a local Korean office. The most important factor for considering an investment in SEUS states by Korean businesses and investors, however, is the positive and friendly attitude of development officials of the seven SEUS states. It is widely believed in the field of economic development that the seven SEUS states are more aggressive than other areas of the U.S. in pursuing new industries.
If the U.S. market is worth considering, SEUS states are worth being
considered as a top priority. The entire power point presentation can be viewed
at semoonchang.com. [email@example.com]
US Economy From an Insider's View
By Chang Se-moon
University of South Alabama
Many analysts in Korea blame the weak American economy for much of Korea's economic and financial problems. Um Sang-pil of the Korea Trade Promotion Agency, for instance, said "Our stock market and economic situation depend mainly on the U.S. economic situation," while James Chang at Samsung Electronics stated that "The Korean stock price heavily depends on the United States market." Jake Jang of Hyundai Motor further stated that "We have 1,200 Hyundai cars waiting to be unloaded in Portland (Oregon)," and " we have another 500 Kia cars also waiting." It seems important to know how the U.S. key policymakers are assessing the U.S. economy at this very juncture.
Harvey Rosenblum is vice president and director of research at the U.S. Federal Reserve Bank of Dallas. He is also the past president of the National Association of Business Economists. Lately, he spent some time with Alan Greenspan to brief the chairman of the Fed's board of directors regarding the status of the U.S. economy. On October 8, Rosenblum made a keynote presentation during the annual meetings of the Association for Business and Economic Research, held at the Monte Carlo Hotel in Las Vegas. This is the summary of his assessment of the current U.S. economy.
The latest recession of the U.S. economy officially began in March 2001. Although an official announcement has yet to be made, the recession most likely ended in November with recovery starting in December 2001. The concern lately relates to the unusually weak recovery. The growth rate of the U.S. economy during the first year of the current recovery is projected at 2.5 to 3 percent, in comparison to the historical average of 6 percent. Rosenblum jokingly cited the guitar string theory by Milton Friedman, according to which a weak recession leads to a weak recovery.
Inventory corrections ran its course with low manufacturing and wholesale inventories. Retail inventories are also low but slightly up lately. This is good news, but the problem is weak demand. Capital goods shipments and new orders are low, and retail sales show steady growth with consumer spending projected to increase at an annual rate of 3 to 3.5 percent. The current recovery is a rare one in that the recovery is not accompanied by job increases.
Although many are concerned about a double-dip recession, Rosenblum does not feel that the weak U.S. economy is headed for a second recession anytime soon. Retailers and wholesalers are maintaining low inventories, possibly for fear of a war in Iraq that may keep consumers out of stores and keep them at home watching the war on television. "If there is a pick-up in demand, there is going to have to be a pick-up in production to meet demand. However, demand hasn't picked up that much, and we've got a big question on the consumer side (of spending)," he said.
One concern of the falling stock prices is the wealth effect. Falling stock prices lower the net worth of household assets, making consumers feel poorer and reducing their spending. The lowered consumer spending may further weaken the economy, possibly leading to a double dip recession. Rosenblum notes that the ratio of household net worth to GDP was very high before the 2001 recession and fell to 4% during the latest recession, which, however, is still above the 3.5 percent historical average. Rosenblum claims that the wealth effect has been inoperable since 1995. If this assessment is accurate, the adverse impact of falling stock prices on the economy would not be as bad as some analysts may worry.
Rosenblum is concerned about the financial market. The junk bond or high-yield corporate debt markets are paying a big spread over low-risk Treasury notes and bonds, "signaling trouble," he said. Bond analysis firms rate the bonds of weak businesses as junk or below investment grade, because these businesses are considered more likely to fail than large blue-chip companies. When the economy is weak, marginal companies are generally more likely to encounter financial problems. So the yields on their bonds increase relative to government bonds.
Although about 40 percent of the U.S. communities are burdened with an over-priced housing market, Rosenblum does not believe that a housing market bubble is about to burst. In 1995, there were few communities that had an overpriced housing market. It is highly likely that housing prices in many U.S. communities may not rise, at least in the short run.
Rosenblum spent a considerable amount of time commenting on the possibility of a deflation in the U.S. economy. Rosenblum states that the United States is winning its 50-year war with inflation, but now needs to guard against deflation. "The economy seems to be as close to price stability as any time in the last 50 years," and "Price stability may require boosting inflation rather than containing it," said Rosenblum. He added that "I think the nature of the battlefield has changed."
The nation hasn't yet achieved complete price stability. But economists will know the battle is over when 30-year mortgage loan rates drop to around 4.5 percent and the Fed starts to adjust interest rates by one-eighth of a percentage point rather than one-quarter, he said. "If we do morph into disinflation, the (Federal Reserve Board's) ability to do anything about it is extremely limited," he said. The Fed may be unable to reduce already low short-term rates much more, which is one way the central bank stimulates the economy.
Rosenblum states that he now has no more understanding of inflation than in 1970, when he first joined the Fed. "Inflation is not just a monetary phenomenon," said he, stressing that uncertainty from delayed effects of NAFTA, immigration, deregulation of telecom, financial and other industries, globalization and other factors have long-term consequences that are immeasurable.
If deflation comes, the federal government may have to increase spending to spur the economy, but political leaders could become so partisan and contentious that Congress may fail to take any action to boost the a weakening economy. If Democrats and Republicans lack a solid majority in Congress, "you could end up in a political stalemate into which the economy continues to sink into more deflation because nobody is doing anything about it," he said.
My readings of Rosenblum's presentation are that the U.S. economy recovered
from the 2001 recession in December last year, but began slowing down in July
this year; that the economy is not likely to return to another recession soon
but the growth will not be robust; that there is no indication of a strong
recovery anytime soon; and that the near future of the U.S., as well as the
world economy, is clouded because of the possibility of an impending war in
Iraq, potential financial shocks in Japan and Brazil, and continuing threat from
terrorism against civilized nations.
Economic Implications of NK's Nuclear Weapons Program
By Prof. Chang Se-moon
University of South Alabama
The North Korea's admission of their existing nuclear weapons program during the Oct. 3-5 meetings in Pyongyang between the North Korean delegation led by Kang Suk-ju and the U.S. delegation led by James Kelly, assistant secretary of state for Asian affairs, carries numerous economic as well as political implications.
The North's nuclear weapons program violates the 1994 agreement under which North Korea would no longer seek to develop nuclear weapons in exchange for the agreement by the United States, Japan and South Korea to help build two light water nuclear reactors to replace the plutonium-producing reactors that can be used to make nuclear weapons. The admission, although suspected for a long time, was unexpected because construction of the reactors began just two months ago.
I am not a political scientist and thus will leave the conjecture of why the North made the admission to political scientists. As an economist, I would like to explore some possibilities of how the admission may affect dollars and cents of countries directly involved.
My analysis is based on my own conviction, stated earlier in August in this column, that leaders of North Korea are rational in their own way. In other words, they knew what they were doing when they made the admission and they had their own reasons regardless of whether these reasons make sense or not from the view of civilized society.
Question is: What were the reasons and what economic gains could they possibly have had in mind? More importantly, how will the admission affect the future of the economic relation between the two Koreas?
Clearly, the most important issue is the future of the sunshine policy. Until now, the sunshine policy can be viewed as a noble effort to bring the North to the negotiation table towards a peaceful unification by minimizing the possibility of a military confrontation. According to South Korea's government sources, the South had spent $110 million annually from 1995 to 2001 in economic assistance to the North.
In addition, the amount of trade between the two Koreas was only $18.7 million in 1989 but increased to over $400 million in recent years. Recent reports also indicated that as much as $400 million might have been sent to the North allegedly as an inducement of the North towards negotiations for unification.
The North's admission of the nuclear weapons program is not likely to change the direction of the sunshine policy in the short run because the North badly needs financial help from the South.
The admission, however, may lead to a soul-searching review of the policy's scope by new leaders of the December presidential election. This is because the future economic assistance to the North can be perceived as an assistance under a threat rather than a patriotic effort. The nature of the assistance may turn more toward joint ventures between the two Koreas rather than the one-way traffic from the South to the North as practiced in the past.
This also means that new leaders of the South will have to be more patient and thoughtful in crafting the future sunshine policy. The relation will be more rocky but it is highly unlikely for the North to actually provoke a military confrontation to extract more economic gains from the South so long as the South remains under the umbrella of the U.S. defense perimeter. The South's budget for national defense may undergo a careful review for possible increases, however.
Another important issue relates to the future of the North Korea's efforts to introduce the market economy. This movement toward the market economy is also not likely to change because signals from the North are too numerous to detect any reversal of the movement.
In 2001 alone, North Korea sent over 480 officials to China, Australia, Italy, the United States, Sweden, and international organizations for study of international economics, finance, trade, and accounting practices in their efforts to build a supply of technocrats that are needed for economic reforms.
Recent visitors to the North mentioned a freer communication by their North's counterparts. Exchange of athletes and entertainers during this year has been a positive indication. Several joint projects in progress in the North in conjunction with leading businesses of the South represent the North's realization that changes have to be made.
The North's plan to develop Shinuiju as a special administrative region for free trade is another sign that they want to move forward in adopting the market economy.
One uncertainty over the North's movement toward the market economy will hang over our heads in that there may be a greater support for President Bush's policy that characterized North Korea as an axis of three evils because the North's admission will be viewed by many as another corroboration of President Bush's assessment of the North Korean government.
A military pressure combined with an olive branch from the U.S. on North Korea may increase for a diplomatic ending of the North's nuclear weapons program. The ability of the North to continue its march toward the market economy depends on whether the North supplies any military hardware to terrorists.
If the North does supply military hardware to terrorists, the U.S. pressure will leave little, if any, room for the North to maneuver toward the market economy. When chips are down, I doubt that the North will. Realistically speaking, I am reasonably certain that any movement toward the market economy by the North will require the U.S. dollars. North Korean leaders should know this although they may not want to admit it.
As White House spokesman Sean McCormack said, "Everyone in the region has a stake in this issue and no peaceful nation wants to see a nuclear-armed North Korea."
The North's admission may delay the expected settlement of the Japan's occupation of Korea that ended in 1945 and thus delay financial assistance from Japan that the North may have counted on.
The admission may also encourage Japan to increase military expenditures and thus hurt the chances for a quick recovery of the Japan's sluggish economy.
China and Russia will be adversely affected through a slower investment by South Korea and the U.S. unless the issue is settled peacefully. China's recent arrest of Yang Bin already has a chilling effect on the North's attempt to develop Shinuiju as a free trade region.
For the current and new leaders of the Seoul government, guards will have to
be up always. The simple fact is that we are dealing with the nation that killed
17 members of a visiting South Korean delegation, including four Cabinet
ministers, in Burma in 1983; exploded a bomb in 1987 on a Korean Air jet and
killed all 115 on board; sent a spy submarine in 1996 that ran aground off South
Korea's east coast and caused 13 South Korean soldiers and civilians and 24
North Korean commandos to be killed; and provoked a Navy gun battle off Korea's
west coast in 2002 further claiming precious young lives. Economy rarely grows
in a politically unstable environment.
Korea's Flood Management Policy
By Chang Se-moon
University of South Alabama
I don't know why, but I do have a great sympathy for those in Korea who were hit by, and suffered through, the recent Typhoon Rusa. It may well be because I live in a coastal area that is prone to be hit by hurricanes, which are called typhoons in Korea and the rest of the Pacific Ocean area. Much of the news media called Typhoon Rusa the worst natural disaster in half a century, with over 200 casualties and an estimated loss of $3.4 billion. Even in the United States, which has been hit by major hurricanes so many times in recent years, Korea's losses from Typhoon Rusa rank third costliest, behind only Hurricane Andrew of 1992 that caused $26.5 billion in damage and Hurricane Hugo of 1989 that inflicted $7 billion in losses.
Every time I read a news report about flood damage in Korea, I wonder whether Korea as a nation is doing the best it can to minimize the losses from floods. I especially feel this way when I look back at all the super achievements that Korea has made in ship-building, highway construction, automobile manufacturing, computer chip making and many other technological marvels.
Considering that Korea has many mountains and is mostly hilly with the exception of its southwestern corner, it is understandable to some extent that flooding is inevitable, especially in Kangwon, Kyongsang, and Chungchong provinces. When significant flood damage occurs almost every summer, however, I feel that there may be a room for improving the way the Korean government manages floods.
Traditionally in Korea, funds needed to assist flood victims have come from donations from the private sector. Since Rusa was the worst flood that Korea has experienced, the amount of donations is also the largest, and estimated to be over $60 million. The amount should increase since the campaign is still going on in Korea and also among Koreans living abroad.
I can see two problems with the current approach toward managing floods and flood victims in Korea. One is that the amount of donations is nowhere near the amount of losses, and the other is the possibility of arbitrariness in distributing these funds among victims. According to news reports, many victims in the countryside have complained why they were given so little in comparison to victims in urban areas. Overall, a more structured solution may be in order.
In the United States, flood problems as well as other natural disasters are managed through the Federal Emergency Management Agency. Legal bases for managing flood problems are the National Flood Insurance Act of 1968 and the Flood Disaster Protection Act of 1973, as amended in 1997, as well as the National Flood Insurance Reform Act of 1994. Let me briefly go over major points of these laws that can be considered for possible adoption in Korea.
The cornerstone of managing flood problems is national flood insurance in conjunction with the requirement of land-use control. Flood damage can be so massive that private insurance companies have avoided insuring private properties against losses from floods. This reluctance by private insurance firms led to the national flood insurance program. The national program is a way of sharing the risk of flood losses through a program of flood insurance which can complement and encourage preventive and protective measures, and making flood insurance available to those in need of such protection on reasonable terms and conditions. The National flood Insurance Fund was established in the U.S. Treasury Department.
The first step of managing flood problems is to identify flood risk zones or flood prone areas. One potential problem in Korea is that because of topography, there may be too many flood risk areas. This cannot be a reason for not trying, since some areas, including many coastal areas, are especially flood prone with a great risk of large damage. This step may be followed by the publication of flood maps that need to be reviewed and updated. In the U.S., flood maps are required by law to be updated every five years.
A concurrent first step is to establish the national flood insurance fund directly under the supervision of the national government. The sources of the fund can be a combination of an annual appropriation from the government and insurance premiums that those living in flood risk areas will be paying. At least in the beginning, insurance premiums will have to be very low to encourage more of those living in flood risk areas to participate.
These steps will have to be followed by adequate land use and control measures. Korea's national government may separately focus on areas that can cause widespread flood damage by taking necessary steps that can expedite faster and safer flow of floodwaters as well as prevent soil erosion and mudslides. For areas where individual property owners have some degree of control, the national flood insurance program may encourage property owners to participate in the national flood insurance program.
There are several technicalities that policymakers need to keep in mind in developing the national flood insurance program. First, there has to be a limit in coverage. The National Flood Insurance Act of the U.S., for instance, limits the insurance coverage to $35,000 for any single family dwelling and $100,000 for any residential structure containing more than one dwelling unit. Second, the national flood insurance program needs to require state and local governmental units to develop land-use and control measures. Section 4022 of the U.S. National Flood Insurance Act, for instance, states that no new flood insurance coverage shall be provided in any area unless appropriate public bodies adopt adequate land use and control measures. In order to encourage local planning, the national program may provide planning grants to local governments.
Importantly, the national program has to provide incentives in the form of credits on premium rates for flood insurance coverage in communities that enforce measures to reduce the risk of flood and erosion damage. If the risk is so high in a given area that nothing can be done to protect the area's existing properties, the national program may purchase the property and force relocation of residents to a safer area. Section 552 of the National Flood Insurance Reform Act of 1994, for instance, allows the Director of the Federal Emergency Management Agency to pay amounts under flood insurance contracts for demolition or relocation of structures as provided in the National Flood Insurance Act of 1968.
I know it would be difficult to develop anti-flood programs in Korea because
of topography and population density. Policymakers, however, may keep in mind
that the objective of developing anti-flood programs is not to eliminate but to
minimize flood damage.
Koizumi's Visit to North Korea and the Issue of WWII Victims
By Chang Se-moon
University of South Alabama
Prime Minister Junichiro Koizumi's trip to North Korea on Sept. 17 has many different policy implications. Whether the meeting between Koizumi and Kim Jong-il results in any substantive agreements may not be known for a while. One of the significant issues involves compensation for Japan's long occupation of the Korean peninsula, forced labor for Japanese businesses as well as the suffering by Korea's "comfort women" at the hands of Japanese soldiers during World War II. There is already a rumor that North Korea is asking more than $10 billion from Japan.
At least one factor that will prompt North Korea to work toward an agreement with Japan in the near future is the need for investment capital by North Korea as it moves forward in implementing a market economy. Before Pyongyang works on the agreement with Japan, however, it may be important for North Korean officials to learn how South Korea handled the compensation issue when the South concluded the (South) Korea-Japan Agreement in 1965.
No matter how much North Korea hates the United States, the North's officials need to know that the reason why North Korea and Japan have to have an agreement of their own is because Article #4-(a) of the 1951 Treaty of Peace with Japan, which was signed in San Francisco, stipulated that any disputed issues between Japan and Korea "shall be the subject of special arrangements" between the two nations since Korea was not a signatory to the 1951 Treaty. In other words, Korea was not regarded as one of the Allied Powers and thus did not win the war against Japan; Korea has to negotiate with Japan not as a winner of the war, but as a beneficiary of the victory of the Allied Powers. This is how the 1965 Korea-Japan Agreement was negotiated, and undoubtedly this is how Japan will approach the negotiation process with North Korea. The 1965 Agreement is called the Korea-Japan Agreement in Korea, but is known as the Japan-Korea Agreement in other countries.
What are some specific lessons?
First of all, it is a safe bet that Japan will make sure that any payment to North Korea is economic assistance, not reparation for its illegal occupation of Korea, its illegal use of forced labor or its inhumane and brutal treatment of Korean women. I seriously doubt that North Korea can prevail on this issue because North Korea now, just like South Korea in the 1960s, badly needs investment capital.
Secondly, South Korea received $600 million in 1965 either as grants or loans. The $600 million in 1965 prices is $3.43 billion in today's prices if the U.S. consumer price index is applied. This probably means that Japan may try to settle at about $3 billion to $5 billion of loans and grants. We will wait and see how much progress North Korea can make with its claim of over 10 billion dollars.
Third, there is an important issue of compensation for forced laborers and "comfort women" during Japan's illegal occupation of Korea. South Korea made a huge mistake by not clarifying and protecting the litigation rights of Korea's individual victims.
Korean scholars argue that any waiver in the 1965 Agreement extended only to government-to-government claims and did not affect individual claims or the rights of individuals to bring lawsuits, while Japanese scholars take the view that Article #2-(1) of the 1965 Agreement completely settled all kinds of claims by Koreans against the Japanese Government and Japanese nationals. The point is that the 1965 Korea-Japan Agreement left claims against Japan by Korea's individual victims, at best, subject to different interpretation, effectively nullifying their rights.
It is sad but obvious that the 1965 Korea-Japan Agreement was a political compromise between the two governments rather than a document settling disputes and claims that arose from Japan's illegal occupation of Korea. The whole issue of reparation from the Japanese occupation was entangled in the Japanese unwillingness to admit guilt for their illegal occupation of Korea as well as then President Park Chung-hee's politically expedient approach toward the 1985 Agreement, with no understanding of its future impact on Korea's individual victims.
Civil lawsuits by the Korean victims of World War II against Japan and Japan's businesses have a long history. Sohn Jin-doo, who requested compensation for his injuries from the atomic bombing of Japan, filed the first one in 1972. Numerous lawsuits by the Korean victims of World War II have been filed against Japan and Japanese businesses since 1972, requesting compensation for forced labor without pay and reparation for pain and suffering by the former "comfort women." So far not a single case is believed to have been won by any of these victims, although several cases were settled out of court.
Three factors will complicate North Korea's approach toward settling the issue of compensation for forced laborers and "comfort women." One is that Japan will continue to resist admission of guilt even if Japan is under significant pressure from the international community to do so, as evidenced by the final judgment of the Women's International War Crimes Tribunal of Japan's Military Sexual Slavery that was submitted to the Tokyo Tribunal in Hague, the Netherlands on December 4, 2001. The other, more compelling issue is the rapidly declining number of surviving forced laborers and "comfort women" in North Korea. The third factor is that any agreement between North Korea and Japan that deviates substantially from the 1965 Agreement between South Korea and Japan may prompt South Korea to request a revision of the 1965 Agreement that Japan may not want.
Reportedly, a secret agreement was made in the early 1950s between Japan and the Netherlands explicitly waiving individual rights of Dutch citizens to make claims against Japan. In one of the exchanges made between the two governments, the then Prime Minister of Japan is reported to have stated in his letter to the Dutch government that "In view of the constitutional legal limitations referred to by the Government of the Netherlands, the Government of Japan does not consider that the Government of the Netherlands, by signing the Treaty, has itself expropriated the private claims of its nationals so that, as a consequence thereof, after the Treaty comes into force, these claims would be nonexistent."
Due to the small number of survivors among these victims, however, my
suggestion to North Korea is to make a collective settlement for all surviving
victims living in the North, without becoming the victim of negotiations that
may drag on until the last victim passes away. If such a settlement includes
some compensation for surviving victims in the South as well, many in the South
may view such efforts by the North as a sensible and heartwarming response to
the South's patriotic sunshine policy.
Language Barriers in Air Flights
By Chang Se-moon
University of South Alabama
Around midnight of Sept. 10, last year, one of my friends was aboard a Korean Air flight that left Atlanta, streaking toward Seoul over Alaska. About ten days later, he and his family returned from Korea. Out of curiosity, I asked how his flight was. He said that at about noon New York time, the plane passed Alaska but suddenly turned around and was escorted by a U.S. military jet to land in Anchorage.
Passengers knew what was going on because many had cell phones and communicated with their family members once on the ground. All hotels and motels near the Anchorage airport were already full and they were placed at a small motel more than an hour's drive from the airport. After more than 24 hours of unplanned stay in Alaska, the plane was allowed to take off and landed safely in Korea.
There was another Korean Air plane in the area that afternoon flying from New York to Seoul. The fate of this plane could have been vastly different from the one my friend was on, because the New York to Seoul Korean Air Flight 85 with 215 people aboard was almost shot down by a U.S. military jet on the chaotic early afternoon of September 11, 2001.
The story as conveyed by Alan Levin in the August 13, 2002 issue of the U.S. version of the USA Today is scary to say the least.
Radars keep track of planes and their whereabouts. Beyond 200 miles off shore, however, radars cannot track the path of planes and the tracking is left to private companies that transmit messages between airline companies and their jets.
As explained by Levin, problems began shortly after the September 11 attacks in New York. ARINC in a Maryland office park, a company that airlines pay to transmit text messages to and from their jets, began a search for more hijacked flights. When ARINC scanned every communication it transmitted that day, it found something suspicious sent by Korean Air 85, which was headed for a refueling stop in Anchorage. In a message sent at 11:08 a.m. New York time to Korean Air's base, the pilots included the letters "HJK" _ the code for hijacked.
Fearing that the message was a coded plea for help, ARINC officials passed a message on to the Federal Aviation Administration, which notified Anchorage controllers and the North American Aerospace Defense Command (NORAD). NORAD sent fighter jets from Elmendorf Air Force Base near Anchorage to follow it.
When Korean Air Flight 85 reached Anchorage's airspace about 1 p.m., controllers radioed coded questions to the pilots to determine whether they were hijacked. Instead of reassuring the Anchorage controllers, the Korean jet pilots declared themselves hijacked at 1:24 p.m. They set their transponder, which transmits information about the flight to radars, to the four-digit universal code for hijacked - 7500.
As the Korean jet neared Alaska on its way to Anchorage, U.S. military officials, who had ordered two F-15 fighters to tail the jet, told Anchorage air traffic controllers that they would shoot it down if the jet did not turn away from populated areas. During the next 90 minutes, officials on the ground launched evacuations in Anchorage, at the Trans Alaska Pipeline and in Whitehorse, the capital of Canada's Yukon Territory. Alaska's governor ordered an evacuation of large hotels and federal buildings in Anchorage. The U.S. Coast Guard ordered tankers out to sea at nearby Valdez, Alaska, where they had been loading oil from the Trans Alaska pipeline.
Eventually, the Korean jet was turned away from Anchorage and allowed to land in Whitehorse at 2.54 p.m., more than 500 miles beyond its original destination. Somehow, FAA officials near Washington D.C. were not convinced that the plane was hijacked. The plane's transponder emitted the hijack code for the entire 90 minutes until it landed in Whitehorse.
How did it happen?
Levin states that to this day, no one knows why the Korean Air pilots issued the highjack alert. One plausible guess is that the Korean jet pilots may have misinterpreted the controller's comments as an order to reset the transponder.
Perhaps, the more important question is how to avoid such mishaps in the future. During my experience of flying as a passenger in Korean Air jets, I never felt concerned about the English speaking ability of Korean Air pilots. I could be wrong, however. Announcements that I had heard over the plane audio system were all routine ones and can be repeated exactly the same in all flights. In retrospect, there is no way for me to know how Korean jet pilots would speak in English in emergencies, such as September 11 hijackings and attacks. I wanted to, but never had a chance to fly Asiana because of Asiana's poor connection to Alabama, where I live.
I have no doubt that officials of the Korean airlines such as KAL and Asiana are already taking care of the problem. Without knowing that they actually are, however, I would like to restate two obvious recommendations that Korean airline companies may consider in order to avoid future disasters.
One is to hire a foreign co-pilot for each cockpit, whose native language is English for all overseas flights. However, hiring an English-speaking pilot or co-pilot is not a guarantee that such mishaps will be avoided. As recently as August 27 this year, a US Airways flight from North Carolina to Maryland also had a miscommunication that led officials to believe that the flight had been hijacked. Pilots in that plane used code words that indicated a hijacking when talking with controllers, thus attracting an escort by two armed F-16s from Andrews Air Force Base in Maryland. Since September 11, last year, the August 28 issue of USA Today reports that fighter jets have been called into action to respond to possible hijacking more than 500 times.
This leads to the other recommendation which is that Korean airlines issue language certification to pilots only after they have trained extensively by living, sleeping and going through simulated disasters in a English-speaking environment.
Language is more than speaking and listening. Language training should
include the ability to understand not only spoken languages but also unspoken
messages. Language requires an understanding of the culture, the environment,
and how messages are actually communicated between two parties in places where
the language is spoken. It would be nice for officials of Korean Air and Asiana
to reassure their passengers of how well they train their pilots in flight
Views of Deputy Prime Minister Jeon Yun-churl
By Chang Se-moon
University of South Alabama
Earlier in August, I had the opportunity to sit next to Deputy Prime Minister and Minister of Finance and Economy, Jeon Yun-churl, during the luncheon of this year's joint conference between the Korean Economic Association and the Korea-America Economic Association. Deputy Prime Minister Jeon touched on several aspects of the Korean economy and I, like most others in the audience, found Jeon's luncheon presentation to be reasonable, positive, and enjoyable.
According to Jeon, American standards have become global standards. America's new capitalism stresses private utopia, called "privatopia" by Jeon, in which society is gradually transforming into a "winner takes all" environment. It was nice to hear Jeon say that reforms in Korea need to take care of those who are hurt by the market economy, because it is very important to take care of losers from the market economy. I have long been teaching my students that the market economy can be cruel, creating many losers. Society has to take care of the losers of the market economy to survive in the long run. The United States has numerous safety nets to take care of the losers of the market economy, which include SSI (supplemental security income), TANF (formerly of food stamp), medicaid, unemployment insurance, homeless programs, and many more.
Jeon made the interesting observation that many nations support multilateral solutions on economic issues through such means as free trade areas and economic unions, but practice bilateral solutions. Multilateral promotion of global trade is an ideal that eventually benefits all nations, but trade issues arise from imports and exports of individual products from particular countries that can easily be identified. This may explain why many countries practice bilateral solutions while advocating multilateral cooperation. This also means that the practice of bilateral solutions will continue for many years to come.
Jeon pointed out that the Korean economy has made a significant improvement since 1990 in social care and social infrastructure. Jeon then challenged economists in the audience to broaden their way of measuring economic growth beyond the simple growth rate of GDP, which may ignore the improvements that Korea has made in areas of social care and social infrastructure. His comment can be appreciated especially when the growth rate slows down and the general public may forget all the cumulative improvements that the economy has made.
Jeon stressed the importance of transparent communication between businesses and labor unions. Jeon also reminded the audience that union strikes, if they are illegal, are now handled as civil cases rather than as criminal cases. This may make strikes, if they are illegal, costly to unions. Apparently, some labor strikes these days are controlled through cell phones and the Internet by their leaders who stay far away from the actual site of strikes.
Jeon spent a considerable amount of time explaining the positive accomplishments of the Korean government since 1997. For instance, he opined that public sector reform is a broad term, which may include political reform, but governmental efforts are limited to the privatization of businesses previously owned by the government. Before reform, retirement pensions were one month's pay for one year's work in the business sector, but two months' pay for one year's work in the banking sector. After reform, retirement pensions in the banking sector also became one month's pay for one year's of work. During reform, 14 of the 30 largest corporations failed; the average debt ratio of corporations decreased from 350 percent of equity to less than 200 percent of equity and bad loans of the banking sector fell from seven percent to three percent. More importantly, Jeon emphasized the improved competitiveness of Korean businesses through the government's reform efforts.
Jeon then asked economists in the audience how they would evaluate reform efforts undertaken by the Korean government since 1997. Interestingly, answers were given during the morning's general session, two hours before Deputy Prime Minister Jeon made his luncheon presentation. I personally have warned Jeon not to expect too much from economists since economists by nature tend to be more critical than complimentary. Recall that economics is called a dismal science.
According to Professor Kim In-joon of Seoul National University, post-1997 economic reforms in Korea have been moderately successful and need more work. Even after all the improvements made through mergers & acquisitions, better loan evaluation, privatization, restoration of the ability to pay, and taking care of bad loans, private investment still requires government support, and foreign investors request protection for further investment. Perhaps as a proof of his contention that reforms are yet to be successful, Kim presented a table indicating changes in credit rating before the 1997 crisis, during the peak of the crisis, and the latest. They are AA-, BBB- and BBB+ by S&P; A1, Ba1 and Baa2 by Moody's; and AA-, BBB- and BBB+ by Fitch IBCA.
Professor Chung Gap-young of Yonsei University concurs with Kim in that reforms are a continuing process and need more work. According to Chung, after the introduction of outside directors _ adopted as a movement toward transparent corporate management _ the total number of directors decreased, making the intention of corporate managers after the introduction of outside directors rather curious if not questionable. Chung points out that corporate auditors are now given more power but still are not effective, and that corporations have a legal difficulty in getting rid of unprofitable businesses. Chung further pointed out that latest corporate profits relative to gross sales are 5.5 percent in Korea, 4.3 percent in the U.S., and 3.8 percent in Japan. However, net profits for the same period are zero for Korea, 0.9 percent for the U.S. and 1.2 percent for Japan. Profits appear greater but are actually lower in Korea than in the U.S. and Japan.
Dr. Lee Kye-sik of KDI, who has long been active in economic reforms in Korea as a public official, stated that the Korea's public sector had been downsized by 140,300 workers from 1998 to 2001, making the public sector smaller but more efficient. Frustrated that reform measures were so ineffective, Lee told the audience that President Kim Dae-jung once told reform committees not to bring any more reform measures to him for approval in order to save ink. Lee believes that reform measures in the public sector have only begun and should continue to move forward.
Finally according to Deputy Prime Minister Jeon, there are no national
boundaries in economic competition, there are no term limits for economic
reforms, and there is no such thing as pro-government or opposition party in
managing the economy, thus stressing the importance of the continuity of
economic policies. This last point sounded rather hollow to me especially in
Korea where the average tenure of cabinet members is one of the shortest among
all advanced nations.
What If I Were Guus Hiddink?
By Chang Se-moon
University of South Alabama
Guus Hiddink arrived from the Netherlands in January 2000 to take control of the Korea's national soccer team in preparation for the eventual super accomplishment during the 2002 World Cup Finals held in Korea.
The team proceeded all the way to the semifinals, sending the entire nation into a state of excitement and euphoria. The Korean government subsequently developed many good plans to supplement the World Cup success by, for instance, planning a World Cup Memorial Hall in the Seoul World Cup Stadium, developing shopping and cultural facilities in the ten World Cup stadiums, and working to organize six professional soccer teams in major cities including Seoul, Taegu, Inchon, Kwangju and Sogwipo by 2005.
Korea went a step further by showering Hiddink and his high-achieving players with numerous honors and privileges. I was wondering what would have gone through Hiddink's mind during all these post-World Cup celebrations. This is what I think went through his mind.
If I were Hiddink, I would be happy to receive the million dollar bonus for meeting the Korean Football Association's target of a second round place and all the acts of appreciation expressed by the Korean people such as honorary doctoral degrees awarded to me by several universities in Korea.
I would be happy to receive free first class tickets to fly the Korea's flag carrier anywhere in the world for four years and the Hyundai's JS350 model Equus sedan that has a sticker price of $44,770 and comes fully loaded with a digital navigational system.
I would be appreciative for Hyundai to present members of my coaching staff and the 23 players on the national team with its Grandeur XG sedans as recognition for their accomplishments during the World Cup games, and for the Korean government to give cash bonuses of about $328,000 to each of my coaching staff and players.
I would feel a great honor, along with my coaching staff and players, to receive the ``Blue Dragon'' medal, the most prestigious of the five medals bestowed on athletes who shine in international events.
I would be excited to have Korea's top fashion designer Andre Kim plan on inviting me and my girlfriend Elizabeth to a fashion show as models as a tribute to my work as coach of the Korea's World Cup team. I would be flattered to hear Andre Kim say that I am a man of exceptional fashion sense and Elizabeth a natural showcase of inner beauty and intelligence, although I would wonder how he found out about Elizabeth's inner beauty that I didn't even know existed.
I would like to taste Hiddink wine that one of the hotels where I and the national team stayed during the World Cup came up with, and would like to see the movie about me that is under plans.
I would express my appreciation for Mayor Park Kwang-tae of Kwangju City who not only granted me an honorary citizenship but also named at least one of the city's streets after me. I understand the city is also considering changing the name of the Kwangju World Cup Stadium to the Hiddink Stadium.
If I were Hiddink, I would feel honored to hear that Korea's Justice Department officials are considering giving me real, not honorary, citizenship, if I wanted it. I would wonder, however, why these officials are willing to violate Korean laws by waiving such requirements as for five years residency and the passing of a Korean language and history examination, neither of which I have completed nor am interested in completing.
I would be a popular person not only in Korea but also in the Netherlands because many Koreans, including hundreds of reporters, are planning to visit, and thus boost tourism in, my home country. I understand that several Korean businesses are offering free visits to my hometown to their customers. Hyundai Motor plans to select four winners through a lottery among visitors to its showrooms across the country through to the end of August to award them with free trips to my hometown. Kia Motors will pick 4,700 lucky customers for special gifts, such as free visits to my hometown and signed soccer balls. LG Engineering and Construction also plans to pick several winners for free travel packages featuring visits to my hometown through a lottery among buyers of its new office-style apartment houses.
If I were Hiddink, I would be appreciative of Seoul Mayor, Lee Myong-bak, for organizing such a thoughtful ceremony to give me an honorary citizenship, but wonder why he could not wait until I answered all questions from reporters before he asked me to pose for a picture with his family members. I would also have liked it better if his 25-year-old son dressed more formally rather than so casually in a red Manchester United jersey, shorts and a pair of sandals.
I would be puzzled a little over all theorizing of my coaching style, called the Hiddink Way, Hiddink Syndrome, and the Hiddink style of management. I did train my players hard and selected the best players for the team as every other successful coach would have done. When I look back and think about all the globally successful Korean businesses, I have no doubt that many Korean managers also work very hard and make the best decision that they can, as every other successful manager would have done. I would feel truly flattered at reading reports on my leadership prepared by such prestigious organizations as the LG Economic Research Institute and the Samsung Economic Research Institute. I would be hoping, though, that they are not reading more than what I actually have done or believe in.
If I were Hiddink, I would be hesitant in accepting an invitation by Koreans to stay on as their coach until, at least, the 2006 World Cup in Germany. I still recall all the criticisms during early years of my tenure as coach of the Korean team when we lost to the French and Czech national teams. They complained that I was paid too much and they even criticized me for meeting my girlfriend during the Gold Cup in the United States as if my private life was the cause of the poor showing by the Korean team. It is hard for me to believe that the same people now are chanting: ``Hiddink for President!''
Finally if I were Hiddink, I would really be concerned about the Korean
government's decision to exempt players of the Korean World Cup team from their
26-month military service. I would feel that the military service is a supreme
duty of every citizen of the country regardless of whether he or she is rich,
poor, educated, uneducated, powerful, weak, popular, hated, and what have you. I
would be worried about the future of a nation in which emotions can so easily
sweep the nation's laws that certain young people are exempted from the
mandatory military service simply because they won a couple of soccer games. I
would wonder whether the Korean people really understand the true Hiddink
approach that stresses to always abide by the nation's laws and to consider that
the military service is an honor that every young man or woman in Korea with no
exception should gladly complete. What will Koreans do if a future Korea's team
reaches the World Cup final or even win the final?
Property Rights in North Korea
By Chang Se-moon
University of South Alabama
The 1993 conference in Paris on the lessons of the German unification process for Korea concluded that land reform in North Korea would be one of the first tasks during the transition of North Korea toward unification. Complications arise partly because distribution of property rights such as land ownership in North Korea is a zero-sum game in which there is no way one person can be better off without taking something away from others, and partly because distribution of property rights is more a social issue than an economic issue. As the conference noted, property rights issues will play a prominent, if not a highly controversial, role after Korean reunification.
One view is that property rights can be returned through restitution to original owners if they are still alive and easily identified; state-owned properties can be sold through public auction; rights of properties can be distributed to the general public through a voucher system; and/or properties can be distributed to actual users.
In reality, the actual distribution process of property rights requires a clear understanding of its objectives that of themselves can be conflicting. These objectives may include (a) legal justice by returning properties confiscated by the state to their rightful owners, (b) social justice by distributing properties to current users who may have worked on them for as many as fifty years, (c) promotion of market economy by turning state properties over to those who can manage them more efficiently, (d) savings of emergency management costs by granting a larger share of property rights to those residents who are willing to stay in the North rather than migrating to the South, and (e) political expediency by distributing properties in whichever way that generates least resistance.
Let us, first, review the history of property ownership in the early years of North Korea as explained by Professor Kun-young Yun of Yonsei University.
Until Korea was liberated from Japan in 1945, Koreans owned most of the agricultural land while the Japanese owned virtually all of the large industrial firms. In North Korea, the Provisional North Korean People's Committee completed land reform by the end of March 1946 by confiscating about one-half of North Korean agricultural land and distributing it freely to peasants and farm laborers. North Korean agriculture was predominantly a private business (94.8%) until the end of the Korean War in 1953, with the exception of a small number of state farms. In August 1953, however, the North Korean Labor Party proposed collectivization of agriculture that effectively transformed, by August 1958, all private farms into either state ownership or state-sponsored agricultural cooperatives known as Type 3 cooperatives in which all means of production were owned by the cooperative and output was distributed in accordance with labor contribution only.
In August 1946, the Provisional People's Committee also nationalized industries, transportation facilities, telecommunications and postal services, banks, and other businesses, which were previously owned by Japanese and ``traitors.'' Since all the Japanese had retreated and the ``traitors'' had all but disappeared, these properties had easily been nationalized. Whatever properties remained in private hands quickly disappeared as government controlled the allocation of labor and raw material as well as prices. By 1958, all industries were either state owned or collectivized, according to Professor Yun.
To be practical, one may argue that many precious, historical and pristine areas need to remain as state properties, while major infrastructure such as roads, highways, ports, airports, and other major public facilities need also to remain as state properties. Industrial and commercial properties of varying sizes need to be auctioned off to private owners and market competition, assuming that bid prices exceed minimum reserve prices. Based on the German experience, many of the industrial and commercial properties may find no buyers without subsidies. There is a good possibility that the post-unification government may find it more profitable to privatize some of the properties by waiting.
One tough question relates to what to do with most pieces of land and small properties that North Korea confiscated between 1953 and 1958. Perhaps the key question is who should be given priority in distribution of properties between (a) those original owners and their heirs who were forced to give up on their private property when the North Korean government confiscated the property, and (b) those workers who were forced to work on the land with no ill intention whatsoever of taking the land away from the original owners. Legal justice may prefer original owners, but political and economic considerations may prefer current users of the land.
Restitution of the property to the original owners or their heirs requires identification of owners that is all but impossible because North Korea deliberately destroyed ownership records. Restitution will also generate a vast number of farmers and farm workers with no land of their own even if they worked on the land for so many years. Any attempt of restitution will lead to a long backlog of court cases and ill feeling among many people. Sometimes, it is simply better to forget the past and move on.
Although no two countries are believed to have used the same procedures in privatization of state properties even when they used the voucher program, still the voucher was the most common method of privatizing state properties. In the voucher program, voucher coupons are distributed to individuals, who then use the vouchers to pay for the claims on the privatized property. In all the countries where vouchers were used for privatization, voucher fees were very small.
If unification were to come anytime soon with so many North Koreans having no accumulated assets, vouchers will have to be distributed free of charge based solely on proof of residence in North Korea. An equal number for all adults with a decreasing number for young ages all the way down to the newborn may be one idea, especially if it includes a generous bonus for all those who plan to stay in the North during the tough transition years.
Recent move by North Korea to introduce aspects of the market economy may
force the North leaders to deal with the property rights issue long before
unification comes. How the North will allow property rights, even in a very
limited scale that are basically in conflict with its centralized economy and
political dictatorship, remains to be seen.
Market Economy in North Korea?
By Chang Se-moon
University of South Alabama
The severe economic difficulties that North Korea has been experiencing since the early 1990s strongly suggest that the North Korean economy, and its political leadership, would not be able to survive for long without undertaking economic reforms of some sort, namely, changing to a market economy. This raises numerous questions such as: (1) Do North Korean leaders realize the importance of market reform in revitalizing their troubled economy? (2) Is North Korea's political system compatible with a market economy? (3) What should North Korea do to introduce a market economy? (4) How would North Korea's efforts to introduce a market economy affect unification, as well as business policies of South Korea? And (5) How will all these play out in the end?
First of all, do North Korean leaders realize the importance of a market economy in revitalizing its troubled economy? There are tangible signs that they do. The number of North Koreans who have died of starvation in the 1990s ranges from hundreds of thousands to three million, depending on which report one believes. After many years of struggling for economic survival, North Koreans have reached a point where the survival of their political leadership is no longer assured without sustaining positive economic growth that the North experienced during the past three years.
One sign that North Korean leaders realize the importance of the market economy was the January 2001 speech in China by Kim Jong-il himself in which he praised the results of China's economic reforms. Another sign was a November 21, 2001 article in the North's leading newspaper, Rodong Shinmun, which stated: "Socialism has only a short history and the people lack enough experience in the economic management system, ... If we stick to this hackneyed and outdated method, which is not applicable to the realities of today, then we will be unable to develop our economy."
In 2001 alone, North Korea sent over 480 officials to China, Australia, Italy, the United States, Sweden, and international organizations for study of international economics, finance, trade, and accounting practices in their efforts to build a supply of technocrats that are needed for economic reforms. Several joint projects in progress in the North in conjunction with leading businesses of the South also represent the North's realization that changes have to be made.
The second question relates to whether the North Korea's political system, which requires total control of information, is compatible with the market economy which requires a free flow of information. The introduction of a market economy will eventually erode the power base of the North's political leaders, suggesting that many of the present political and military leaders in the North may resist the transformation toward the market economy. In a sense, North Korea is dammed if it does (reform toward the market economy) and dammed if it doesn't (because of the declining survivability of North Korea as a nation).
This is exactly why North Korean leaders are taking a careful look at the China model that allows market economy so long as players of the market economy do not challenge the political establishment. Two problems merit attention regarding North Korea's desire to adopt the Chinese model. One is that, unlike China that has longstanding succession plans of an undemocratic but smooth transfer of power laid out by Deng Xiaoping in the 1990s, leadership succession in North Korea has been a family affair, which makes it more difficult to allow a free flow of information. The other is that even in China there is no assurance of the China model's survival in the long run. Without democratic elections, China's succession plans are fragile with more room for political maneuvering by current leaders. This seems to be exactly what is happening these days with Jiang Zemin maneuvering to stay on as chairman or general secretary of the Chinese Communist Party.
The third question is: What should North Korea do to introduce a market economy? North Korea needs a pool of technocrats who can carry out reforms for a market economy and an influx of capital for investment. Regarding the needs for technocrats, the North's leaders need to broaden their understanding of the term technocrats beyond those well versed in information technology and computers as they stressed in the new constitution adopted during the September 1998 People's Assembly and stressed again during the March 2002 Supreme People's Assembly. Technocrats should also include economists and business managers who understand how a market economy works.
The issue of capital inflow brings our discussion all the way back to the North's political system and their self-centered and scared leadership. Estimates of the capital needed for infrastructure rehabilitation alone vary widely from a few billion to hundreds of billions of dollars with a moderate estimate being $2 to 3 billion for several years. Much of this capital will have to come from the international community, especially the United States and Japan, which are likely to provide aid to the North through international organizations only if North Korea actively begins reform. North Korea is reluctant to accept guidelines of international organizations because they are likely to undermine their very own survivability.
The fourth question relates to how North Korea's efforts to introduce a market economy will affect unification as well as business policies of South Korea. As has been stressed by many in the past, the level of support for the North through the "Sunshine Policy" has to depend at least on some positive responses from the North to the South's overtures. Leaders of the North are rational in their own way and will respond because they have little, if any, choice. But the response will be at a turtle's pace rather than a rabbit's pace. The Sunshine Policy and the South's investment in the North at least through joint ventures should continue in order for South Korean businesses not to lose future opportunities to participate in the North Korea's transformation process when it comes in on a larger scale.
Finally, how will all these play out? The best of all scenarios would be for
the North leaders to sign a peace treaty with the South and work courageously
with Southern leaders in introducing massive economic reforms for future
generations of Koreans. A more realistic scenario, however, is for the North
leaders to adopt pieces of the market economy from the local level, make
concessions only to the extent that the reform does not threaten the current
leadership, and harshly punish anyone and everyone who threatens the leadership.
It appears that this is exactly what North Korea is trying to do in its alleged
move to promote a market economy by downsizing its food rationing and raising
market prices and wages within the past month or two. I do not believe anyone
knows, at least at this time, what will happen next beyond this muddling-through
for the next several years.
Saga of David Chang and Senator Torricelli Nearly Over
By Chang Se-moon
University of South Alabama
On Jan. 12, this year, I reported the saga of David Chang and Senator Robert G. Torricelli in this column. It appears that the saga is nearing its end.
Senator Torricelli was born on August 26, 1951, with a school librarian and an attorney as parents. He received his bachelor's degree from Rutgers College and earned his law degree from the Rutgers School of Law 1977. He went on to receive his master's degree in Public Administration from Harvard University's Kennedy School of Government in 1980. In 1982, at the age of 31, he was elected as a member of the U.S. House of Representatives for the 98th Congress and for each successive Congress until 1996, when the people of New Jersey elected him to the United States Senate.
He was a rising star in the U.S. Congress; that is, until he met a Korean-American named David Chang.
On January 21, 1997, a federal grand jury issued the first of at least four subpoenas to Chang and his New Jersey companies as part of a federal investigation into the business dealings of Chang's attorney, Berek Don. On February 5, 1999, Berek Don pleaded guilty to illegally steering $11,000 from Chang to Torricelli's campaign fund. On December 10, 1999, Chang was arrested and charged with obstructing the grand jury investigation. In 1999, David Chang and Robert Torricelli traveled together to a meeting in Seoul with the then Prime Minister Kim Jong-pil because Chang wanted to buy the Korealife Insurance Company, which was under the control of the Korean government.
On June 1, 2000, Charles Koo, president of another New Jersey company, pleaded guilty to funneling $20,000 of Chang's money to Torricelli's campaign. On June 2, 2000, Chang pleaded guilty to steering $53,700 in illegal contributions to Torricelli's campaign fund. On April 18, 2001, Torricelli strongly denied that he had broken any law following a report that he received unreported gifts of cash, jewelry, and Italian suits from Chang. On January 3, 2002, U.S. Attorney May Jo White announced that her office ended its investigation of Torricelli's campaign financing without indictment and turned the case over to the U.S. Senate Ethics Committee.
Chang has claimed that he gave gifts to Torricelli in return for the senator's help in business dealings involving the governments of both Koreas. As the relation became sour, Chang even accused Torricelli of trying to kill him. Torricelli's lawyers, on the other hand, described Chang as a pathological liar and an admitted perjurer, and have claimed that Torricelli is totally innocent, being falsely accused by a nutcase.
After the exchange of numerous accusations and counter-accusations, Chang is serving an 18-month sentence for funneling $53,700 in illegal contributions to Torricelli's 1996 Senate campaign, while on July 30, this year, Senator Torricelli received a letter from the U.S. Senate Ethics Committee that severely admonished him for accepting gifts from Chang seeking favors.
The letter signed by all six members of the committee ordered Torricelli to fully reimburse Chang for the electronics, statues and jewelry that he received from Chang, who apparently tried to give gifts to Torricelli indirectly by giving them to people close to Torricelli. The July 30 letter from the Senate Ethics Committee to Torricelli states in part: "Your failure to act to prevent the acceptance of or to pay for gifts of earrings from Mr. Chang to individuals (your sister, an employee, and a friend) in your home at Christmas on the mistaken belief that such items were of little value or were not gifts to you ... evidenced poor judgment, displayed a lack of due regard for Senate rules..."
The committee did not officially discipline Torricelli by removing him from his committee posts or seek a Senate-wide censure. Torricelli maintained that he did nothing wrong and never helped Chang in return for the gifts, but apologized for what he called "lapses of judgment to compromise all that I have fought to build." Incidentally, the U.S. Senate ethics rules bar gifts above $50. Gifts from any one person cannot total more than $100 in a year. An exception is allowed for family and friends, but any gift from them worth more than $250 requires committee approval.
What is the lesson of this saga?
Money and power work in the U.S. just as they work in Korea. However, their influence in the U.S. is limited only to the extent that the laws allow. It is important for leaders of Korean businesses operating in the U.S. to maintain healthy contacts with U.S. political leaders because many important decisions are made in the Congress. Contacts with these political leaders, however, should be made within the legal bounds if these contacts were to last for many years.
As many scholars have stressed in the past including last year's Nobel Laureate in economics Joseph Stiglitz, Korean businesses and Korean-American businesses need to cultivate a strong respect for laws. The July 30 letter from the Senate Ethics Committee chastised the sleazy relation that Torricelli maintained with David Chang by stating that: "Continuation of a personal and official relationship with Mr. Chang under circumstances where you knew that he was attempting to ingratiate himself, in part through a pattern of attempts to provide you and those around you with gifts over a period of several years when you and your Senate office were taking official actions of benefit to Mr. Chang ... evidenced poor judgment."
For Senator Torricelli, a Democrat, the saga may not be over yet. Torricelli
is up for re-election later this year. How his ill connection to a
Korean-American businessman will affect his re-election bid remains to be seen.
Political observers believe that the committee's harsh words breathed new life
into the campaign of his Republican challenger Douglas Forrester, who had made
the favored Torricelli's ethics problem a central campaign issue.
Uses & Abuses of Credit Cards
By Chang Se-moon
University of South Alabama
Once in a while, someone commits suicide because he or she cannot pay off debts piled up through the use of credit cards. The latest such suicide was committed on July 11 of this year by Lee of Busan who owed nearly $10,000 and was under severe pressure to pay off the debt. The problem will only get worse since the number of credit cards in circulation has doubled since 1999.
In 1950, Diners Club and American Express launched charge cards in the United States. In 1951, Diners Club issued its first credit card to 200 customers who could use it at 27 restaurants in New York. Credit cards became part of the information age when standards for the magnetic strip were established in 1970. These days it is hard to imagine life without credit cards. If used properly, credit cards can make life very comfortable. If abused, credit cards can take life away from their users as happened to Lee.
It is important to understand that the primary, if not the only, objective of credit card companies is to make money. Credit card companies are not there to help consumers. Consumers can benefit from use of credit cards that happen to be tools that credit card companies use to make money. What are some proper ways of using credit cards?
There are two rules that consumers must keep in mind when they use credit cards. One is that no one should have more than two credit cards. One credit card is needed for identification purposes. Maybe one more is all right, but never more than two. If the number of Koreans 20 years or older are divided by 105 million, which is believed to be the number of credit cards in circulation, we obtain 3 credit cards per person. In reality, the number of credit cards per person who use credit cards is more likely 4 or 5 since many may not want to have, or may not be qualified to have, credit cards. The other is that consumers must keep receipts and tabulate the amount charged to credit cards every time purchases are made with a credit card. It is so easy to overspend when purchases are made with credit cards unless consumers are constantly reminded of how much they owe on their cards.
If possible, there are three additional rules that consumers may wish to keep in mind. One is to make complete payment during the grace period, with no rollover to the next month that incurs interest payment. This is not easy to do it, but is worth trying. The other is not to carry credit cards, if consumers feel that they are impulsive buyers lacking self-discipline. Finally, consumers may stick to the policy of not making any purchases that cost, say, 100,000 won or more without first thinking about it overnight, thus avoiding impulsive purchases.
Credit cards are just like drugs. If used properly, they keep our body healthy. If abused, they hurt our body. They give the illusion of more money than we actually have. Then we live with less because each month a portion of our income is siphoned away paying past credit debts. Someone once said that all marketing and selling follow the same format: "AIDA" A for getting the attention of consumers, I for developing consumers' interest in the product, D for creating consumers' desire for the product, and A for getting the consumer to make the purchase. It is the second A that requires strong self-discipline in consumers who use credit cards.
The Financial Supervisory Commission (FSC) made a number of regulatory changes regarding the use of credit cards that became effective as of July 1. These rules include banning credit card companies from soliciting new clients on the streets and at public places such as schools, parks and terminals; keeping credit card companies from calling or visiting individual borrowers with bad credit ratings between 9:00 p.m. and 8:00 a.m. to demand payment of outstanding debts; preventing credit card companies from relying on acts of violence and blackmail against debtors and their relatives to collect unpaid debts; and forcing credit card companies to refrain from door-to-door sales unless they receive specific permission from the FSC. Regarding the unintentional losses incurred due to misplaced or stolen credit cards, the FCS said cardholders would be obliged to shoulder only a certain amount of the losses. Cardholders, however, should be made responsible for a larger share of the losses unless they report the lost card within a reasonably short period of time.
Two of new regulations are to force all stores to accept credit card payment regardless of how small the amount of payment is and to force stores to charge uniform prices regardless of whether payments are made in cash or with credit cards. I have a problem figuring out the logic behind these two regulations. They may be cases where it needs to be asked whether the regulations are really better than leaving the transactions to the market system.
Accepting credit cards clearly incurs additional expenses, from 1.5 percent at public hospitals and gasoline stations, all the way to 4.5 percent for entertainment places. It is only reasonable for stores to charge extra to those customers who generate these expenses. In addition, the rule is inflationary since stores are not likely to assume the added expenses.
Requiring stores to accept credit cards regardless of how small the purchase amount is makes just as little sense as requiring stores to charge the same prices regardless of whether payments are made in cash or with credit cards. Accepting credit cards for small amount purchases incurs two types of costs; one is the credit card fee that stores have to pay to credit card companies and the other is the inconvenience of increased transaction costs. For small stores selling low-priced items, these costs may well represent a large percentage of total net profits and thus jeopardize their survival.
I would like to see the FSC reconsider these two rules for possible
elimination by listening to the many complaints that numerous store owners have
aired ever since the rules were put into effect early in July.
How Many More WorldComs?
By Chang Se-moon
University of South Alabama
During this year alone, several large companies in the U.S. have been investigated for financial irregularities, with no end to the probes in sight.
Adelphia Communications is under investigation for questionable accounting practices as well as allegedly improper loans and advances to family members of its former CEO, John J. Rigas. The Arthur Anderson accounting firm has already been found guilty of destruction of documents related to Anderson's Enron audits. When all investigations are completed and its problems are resolved, it is not clear whether Arthur Anderson will remain a major player in the accounting and business consulting businesses.
Dynergy is under investigation for transactions that allegedly made operational cash flow greater than what it actually was. Qwest Communications International is also under investigation for possible improper accounting, involving as much as $1.4 billion in sales of fiber-optic material. Xerox agreed to pay a $10 million penalty under an agreement with the SEC for allegedly accelerating the company's recognition of equipment revenue by more than $3 billion, thus increasing its pre-tax earnings by about $1.5 billion between 1997 and 2000. Xerox says the amount is less, but rumors say the amount is more.
Company executives of energy trading company Enron are under investigation for creating and approving outside partnerships that allegedly kept billions of dollars in losses off Enron's accounting books, again, making cash flow from operations rosier than what it actually was. One of its former executives committed suicide, probably indicating that the problem is worse and may never be fully known.
Former CEO Sam Waksal of ImClone is charged with insider trading. Allegedly, he tried to sell $5 million in ImClone shares and tipped off two family members after learning the U.S. Food and Drug Administration rejected the biotech company's application to market the cancer drug Erbitux, although the FDA's rejection had yet to be made public. Waksal was later arrested on charges of insider trading. The story of ImClone does not end there, however.
Martha Stewart, famous for her likable and homey show on TV promoting her household products, is under investigation for possible insider trading, obstruction of justice and making false statements. She is accused of selling 4,000 shares of ImClone on December 27 of last year, the day before the FDA's rejection of ImClone's application to market the cancer drug. She claims that she verbally instructed her broker to sell if the ImClone share price fell below $60 per share. Martha Stewart was close to Sam Waksal. She proclaimed on TV that when the investigations are over, she would be exonerated of all this "ridiculousness.''
Former CEO Dennis Kozlowski of Tyco International is charged with failure to pay sales tax of more than $1 million on art work. He was also indicted for tampering with evidence. Apparently, Kozlowski bought five paintings in New York and brought them to his New York apartment. To avoid the 8.25 percent sales tax in New York, he had a bill of lading prepared in such way to indicate that the paintings were sent to his home in New Hampshire. New Hampshire has no sales tax. He was indicted for allegedly removing the potentially incriminating bill of lading from a file in his Florida office before turning the file over to the Manhattan district attorney's office. I am a little curious about how the New York district attorney's office found out about the deal.
And then, yes, there is WorldCom with its $104 billion in assets in comparison to Enron's $63.4 billion in pre-bankruptcy filing assets. WorldCom admitted to having disguised $3.8 billion in expenses as capital expenditures during the past five fiscal quarters. That allowed WorldCom to avoid showing a loss for the period, and prompted the Securities and Exchange Commission and the U.S. congress to launch investigations. In addition, WorldCom's CEO Bernard Ebbers is under investigation over whether he knew about the $3.8 billion in expenses booked improperly and for borrowing $408 million from WorldCom to cover margin calls on loans secured by company stock. WorldCom's former CFO Scott D. Sullivan is being investigated to determine whether he inappropriately accounted for $3.8 billion in expenses, thus inflating profits.
How do all these corporate problems affect the economy? Probably not much, so long as there are competing companies in the economy. In case of WorldCom, there are other large phone service companies, such as AT&T, Sprint and the regional Bells that are ready to lure WorldCom's lucrative business customers.
There are many individual victims, however. WorldCom confirmed that it was in default on $4.3 billion in credit. Lenders could demand repayment of $2.7 billion, possibly forcing a Chapter 11 filing. This is only the beginning of the unfolding trauma. A number of banks and retirement systems are in danger of losing their loans or bond holdings. These include $335 million by Citigroup, $100 million by Mellon, $20 million by J.P. Morgan Chase, $90 million by American Express, $80 million by General Electric, $565 million by the California Public Employees' Retirement System, $300 million by New York's state retirement system, and many more, literally affecting everyone in the country who belongs to retirement system of a considerable size.
Perhaps, the most tragic impact will be felt by 17,000 employees who are laid off by WorldCom, many WorldCom retirees and soon-to-be retirees who counted on WorldCom stocks as the nest eggs for their retirement.
Why are there such problems? Most likely, the root of the problem is the
business culture that encourages short-term profits by giving a bonus based on
performance in the short term with no regard to the long-term health of the
company. Pure arrogance of upper-level managers is equally at fault. Will these
problems continue in the future? Yes, I do not see any quick solution. Will the
same problems happen to Korean businesses? Yes, they will, if they are not
happening already. Two key reforms of Korea's corporate structure after the 1997
crisis were transparency and selection of board members from the outside. Keep
in mind that all the firms cited in this article meet the two requirements, at
least on paper.
Jeong vs. Onoda Cement
Professor Chang Se-moon
University of Alabama
MOBILE, Ala. _ All indications are that the co-hosting of the World Cup 2002 was a huge success. When President Kim Dae-jung shook hands with Japanese Prime Minister Junichiro Koizumi on July 1, and declared that through the joint hosting of the 2002 World Cup, Korea and Japan had displayed solid ties of friendship to the world, I had mixed feelings probably because of the story I am about to tell the readers.
Jeong was a Korean student in 1943 at the Hosei University in Tokyo. When Jeong refused the Japanese government's order that he and other students report to Japanese military for service, he was detained by the Japanese police and later sent to Korea and then to a prison camp for "volunteer soldier training." In January, 1944, Jeong was transferred by Japanese government authorities to another camp in Korea, which was operated by and for the benefit of the Japan's Onoda Cement Manufacturing Company.
Jeong became a U. S. citizen in 1997 and brought a class action suit on his own behalf and as a representative of all U.S. citizens and residents who were forced to perform labor for the benefit of Onoda Cement and its affiliates at any time between 1929 and 1945. Simply stated, Jeong claims compensation under California Civil Code section 354.6 arising from the conduct of Japanese firms during World War II. In the lawsuit, Jeong alleges that while at the camp, he and other workers were forced to perform hard physical labor for which they were not paid.
Why is Jeong v. Onoda Cement significant?
California Civil Code section 354.6 is a law that the state of California enacted in July, 1999 to allow the U.S. forced labor victims during World War II or their heirs to bring a lawsuit against firms that abused these victims. Since the law was enacted, more than thirty slave labor lawsuits have been filed against almost sixty Japanese companies. Most of the cases were moved to federal court by the defendants' counsels and consolidated under the U.S. District Court in Northern California. On September 21, 2000, all the cases filed by former Allied POWs were dismissed by Judge Vaughn Walker, who argued that the plaintiffs' claims were barred by the Peace Treaty of 1951.
In the cases of victims from those countries such as Korea that were not signatories to the Peace Treaty, Judge Walker ruled that they also should be dismissed because the California statute infringed on the federal government's exclusive power over foreign affairs and thus did not apply.
There were four additional cases on forced labor that were successfully remanded by plaintiffs to the state courts away from the federal court. Three by a former POW and two widows were consolidated into one case under the Superior Court of Orange County in California where in May 2001 Judge William McDonald ordered the defendant companies and the plaintiffs to enter into mediation.
The fourth case, Jeong v. Onoda Cement, is the only one that survived adverse court rulings for continuing litigation as of today. On September 14, 2001, Honorable Peter D. Lichtman, of the Superior Court of California for the County of Los Angeles, refused to dismiss the case, rejecting arguments made by the defendant Japanese companies and the Bush Administration that the plaintiffs' claims were waived according to the 1951 Peace Treaty. The case was allowed to proceed.
The defendants' motion for judgment is based on three arguments. First, the complaint is not allowed according to the 1951 Peace Treaty. Second, the 1965 Japan-Korea Agreement precludes the claims contained in the complaint. Third, the entire field of resolution of war-related crimes and claims belongs to the jurisdiction of the federal government, not a state court.
Regarding the first argument, Judge Lichtman ruled that the 1951 Treaty did not and does not bar the claims set forth in the Jeong complaint at least in part because the 1951 Treaty affected only those who were U.S. citizens at the time the Treaty was signed and Jeong was not a U.S. citizen at the time the Treaty was signed.
The role of the 1965 Japan-Korea Agreement in Judge Lichtman's rulings is a little complicated. Judge Lichtman states that the Japan-Korea Agreement is a foreign law to which the U.S. was not a signatory, and thus cannot preempt state law under which this lawsuit was filed. The only issue in the Agreement that is relevant to this case is whether there is a waiver in the Agreement to the plaintiff's claims. Interpretations of the Agreement on the issue submitted by the two sides were exactly the opposite. Since the Court was unable to determine exactly what is the correct interpretation of the 1965 Agreement on the issue of the plaintiff's claims, Judge Lichtman concluded that there was no waiver to the claims presented.
The third argument by the defendants relates to the defendants' claim that the state court has no jurisdiction over the war-related claims such as Jeong's and thus the case should be dismissed. Judge Lichtman found no express or implied declaration by Congress precluding claims submitted through this lawsuit and suggested that if Japan finds the litigation offensive, it may lodge a protest with the U.S. government.
What should the Korean government do?
There are essentially two options that are not mutually exclusive. One is for the Korean government to recognize that Korea made a mistake in negotiating the 1965 Japan-Korea Agreement, and unilaterally establish a compensation fund for those survivors who suffered as forced laborer or as "comfort women." Note that former Allied nations such as Canada, Great Britain, Australia, and New Zealand have all decided in recent years to compensate their veterans who were POWs under the Japanese military. It makes little, if any, sense of delaying this action by the Korean government when one considers that civil fines levied on one of the former presidents, if collected, may be sufficient to cover payments to all surviving victims.
The other option is to work with conscientious Japanese toward establishing a foundation similar in nature to the German Slave Labor Foundation that was created for Nazi slave-labor victims. The German government and private companies in Germany contribute to the fund. In fact, a group of human rights lawyers, scholars, and activists in Japan proposed establishing a foundation similar to the German foundation to be preceded by a sincere apology from the Japanese government to all wartime victims. On March 21, 2001, three opposition parties in Japan introduced a bill, albeit no avail, seeking government compensation for "comfort women" in the House of Councilors.
Japan is also under significant pressure from the international community to resolve these issues as evidenced by the Final Judgment of the Women's International War Crimes Tribunal of Japan's Military Sexual Slavery that was submitted to the Tokyo Tribunal in Hague, Netherlands on December 4, 2001. The Final Judgment recommended that Japan recognize its state responsibility and provide full reparations to the victims and survivors.
The Korean government should initiate sincere efforts to work with the
Japanese government to resolve the issues as soon as possible on the basis of
the spirit of cooperation between the two nations that was demonstrated so
proudly to the rest of the world during the World Cup 2002.
Korean Economy After the World Cup Games
By Chang Se-moon
University of South Alabama
The 2002 FIFA World Cup Korea/Japan is the first FIFA World Cup of the twenty-first century, the first tournament held in Asia and the first ever to be jointly hosted. In view of their historic significance, it may be interesting to speculate on the current and future impact of the 2002 World Cup final games on the Korean economy.
Let us first review the impact forecasts made before the World Cup games. The Korea Development Institute (KDI) estimated the event to generate $9.09 billion in production and create 350,000 jobs for Korea. KDI also estimated the total costs for staging the 31-day event, including that for building stadiums in 10 major cities, were about $1.85 billion. Other sources indicate that Korea may have spent nearly $3 billion to prepare for the World Cup finals.
KDI also projected 350,000 foreign tourists to visit Korea for the games alone, while other sources projected about 789,000 foreigners to visit Korea with 315,000 for the World Cup games and the remaining for activities related to the games. The 315,000 foreign spectators were projected to spend about $6.03 billion on accommodation, transportation and food.
The Hyundai Research Institute (HRI) forecast that the special economic benefits from the event would add a full percentage point to the nation's economic growth in 2003. HRI also estimated that the direct and indirect economic impact of the Korea's advance to the 16-country second round of the World Cup would amount to $14.6 billion (18 trillion won). Besides, a berth in the final 16 should have improved Korea's national image to the outside world, which is worth at least $1.4 billion (1.76 trillion won).
Incidentally, the German Football Association estimated the economic impact for its 2006 World Cup finals to include 850,000 to one million foreign visitors who are expected to stay 10 days on the average, and spend about $1,500 per person on transport, accommodation, meals and tickets, generating a total expenditures impact by foreign visitors of between $350 million and $650 million. Taking into consideration all financial aspects such as costs of investments, possible income from renting out stadia, operational costs, degree of stadia capacity, ticket sales, tourist spending and others, the German study concludes that the total benefit could amount to as much as $2 billion or as little as $87 million, which appears considerably smaller than estimates made for Korea's 2002 World Cup finals.
The truth is that it would take at least several months before we find out exactly how many foreigners visited Korea because of the World Cup finals and how much expenditures were generated by these foreign visitors. Estimates of the net impact should not include the amount Korea spent to prepare for the games since this amount could have been spent on other projects, generating a similar economic impact. Estimation of the net impact should be limited to how much expenditures are generated by visitors from overseas that would not have been generated without the World Cup finals. When viewed this way, the net economic impact of the 2002 World Cup finals on the Korean economy may be smaller than what many believe it is.
There is no question some selected industries benefitted greatly during the World Cup final games. These industries include electronics, airlines, household appliance such as TVs, car rental, food & beverages, local transportation, communication, hotels, and souvenir shops. There are other industries that probably suffered during the finals. These industries may include stock markets & brokerage firms, and general merchandise as well as service industries that are not directly related to the games.
How will the 2002 World Cup games affect the future of the Korean economy?
In a recent survey of 232 major trading firms by the Korea International Trade Association (KITA), 138 firms, or 59.5 percent, responded that the World Cup games would increase Korea's exports through new overseas markets as well as increased orders from existing markets. Many respondents in the survey expected the amount of additional export growth attributable to the World Cup games in future years to range 5 to 10 percent. These responses are based on the perception of respondents rather than impacts specific to individual firms. It is encouraging to note that 33.7 percent of the firms surveyed by KITA had plans to invite foreign buyers, 26.3 percent had plans to invite Chinese buyers, and 14.7 percent had plans for product shows and other promotional activities during the World Cup final games.
To see how the World Cup finals affect the economy of the host country after the games are over, I reviewed the growth rates of all World Cup finals host countries since 1954 for the pre-World Cup and the post-World Cup years. The names of the host countries with the hosting year as well as economic growth rates for pre- and post-World Cup years in the parentheses are the following: Switzerland (1954; 4.0% & 5.5%); Sweden (1958; 1.9% & 4.0%); Chile (1962; 3.2% & 1.8%); Great Britain (1966; 1.4% & 3.0%); Mexico (1970; 2.9% & 5.2%); Germany (1974; 9.5% & 4.7%); Argentine (1978; 0.0% & 5.6%); Spain (1982; -0.6% & 0.5%); Mexico (1986; -2.2% & 0.6%); Italy (1990; 2.4% & 0.9%); United States (1994; 2.4% & 2.3%); and France (1998; 1.9% & 2.9%).
There are 11 nations hosted 12 World Cup finals since 1954, with Mexico hosting it twice. Of the 12 occasions, the post-World Cup year growth rate was higher than the pre-World Cup year growth rate eight times and lower four times. The average growth rate for post-World Cup years was 3.083 percent, while the average growth rate for pre-World Cup years was 2.233 percent, with the difference being 0.85 percent favoring post-World Cup years.
Note that host nations were also the World Cup champions during the same year in Great Britain (1966), Germany (1974), Argentine (1978), and France (1998). In Great Britain, Argentine and France, the post-World Cup year growth rates were higher than the pre-World Cup year growth rates. The average growth rate for post-World Cup years of all four countries was 5.400 percent, while their average growth rate for pre-World Cup years was 4.267 percent, with the difference being 1.133 percent favoring post-World Cup years.
In the other eight cases in which host nations were not the World Cup champions during the same year, the post-World Cup year growth rates were higher than the pre-World Cup year growth rate five of the eight times. The average growth rate for post-World Cup years was 2.600 percent, while the average growth rate for pre-World Cup years was 1.750 percent, with the difference being 0.850 percent favoring post-World Cup years. Although there are many factors that influence the growth rates of host countries, one can argue the host country effect hypothesis in which post-World Cup economy is likely to grow faster than pre-World Cup economy because of an influx of tourists, increased exports and lingering effects of new construction in preparation for the games.
What can Korea do to maximize post-World Cup economic benefits? Whatever
contacts that Korean businesses have made during the World Cup finals need to be
pursued without delay because the 2002 World Cup games will fade into memory
rather quickly and the summer Olympics will soon start attracting the world
attention. The 2002 World Cup finals provided greater opportunities for
attracting more tourists and increasing exports through a better image of the
Korea, Inc. These opportunities, however, can be realized only when we all work
harder without dwelling on past glories.
Patent Protection and Technology Transfer
By Chang Se-moon
University of South Alabama
Coca Cola (Coke) is one of the most popular soft drinks in the world. Only two persons are believed to know the secret formula of the Coke. When franchises obtain their bottling rights, they are sent the secret formula in barrels from one of the several plants that mix it. Once the secret formula is sent in a barrel already prepared, the bottling company is then told how much of other ingredients is needed to make the Coke. To reduce shipping costs, water is removed from the syrup when sending it to countries outside the United States. Going back to the two persons who have the knowledge of the secret formula, their identities are never to be disclosed for any reason. In fact, the company's policy is rumored to forbid two officials to fly on the same plane.
Fortunately for the global community, the availability of industrial technology is not as restricted as the secret formula of the Coke.
Korea began an aggressive industrial and trade policy early in the 1960s. From 1962 to 1976, Korea focused on production of fertilizer and cement, and petroleum refining for improvement of infrastructure, while importing simple technology to promote labor-intensive light industries. The Fourth Five Year Plan (1977-1981) put its emphasis on industrialization. The government established public ventures in targeted industries such as steel and chemicals, thus assuming risk, but later turned them over to private ownership.
Until the end of 1980s, Korea had been more an importer of foreign technology. The 1990s represent a turning point for Korean technology in that Korea has become a major exporter as well as an importer of technology. A clear indication of this change is the campaign waged by the Korea Foreign Trade Association, the Ministry of Science and Technology of Korea, the Korea Software Industry Association and the Korea Chamber of Commerce to raise awareness for protecting intellectual property rights. The main message of the campaign is that driving out copyright violations is crucial in protecting Korea's own industrial and technology bases.
The Korean government has changed the direction of science and technology policy during the 1990s under the name of the Highly Advanced National (HAN) project. The HAN project encourages research institutions to work together by pooling their capabilities, facilities, knowledge, and organizational abilities. Korea's major conglomerates (chaebol) have also set up outposts in Silicon Valley and numerous other places worldwide to keep up with rapidly changing technology trends.
In year 2000, information technology constituted 11 percent of Korea's GDP with $47.7 billion of exports and $31.7 billion of imports in information technology.
The success of technological advance is closely related to patents. It may be an interest of many Korean businesses to find out what has been going on in patent reform in the United States. U.S. patent protection over the past two decades has been strengthened in three major ways.
First of all, patent protection has been extended to new subject matter. In 1998, for instance, a federal circuit court affirmed the patentability of business methods and financial service products in State Street Band and Trust v. Signature Financial Group. The decision validated the patent on Signature's software system for evaluating and managing mutual funds. Other business methods receiving patent protection include Amazon.com's one-click Internet ordering process and Priceline.com's reverse auction method for booking airline tickets and other products on the Internet.
Secondly, a greater power was given to patent holders in infringement lawsuits by creating the specialized Court of Appeals of the Federal Circuit to handle appeals on cases involving patent infringement and validity. The outcome of this change has been to increase significantly the success of patent holders in legal disputes. During 1982-1990, 90 percent of patents found to be valid and infringed were upheld on appeal in comparison to 62 percent between 1953 and 1978.
The third area of stronger patent protection involved longer patent lives for some inventions. In compliance with the Trade-Related Aspects of Intellectual Property agreement of the Uruguay Round, the U. S. in 1994 adopted a 20-year patent term starting from the date at which a patent application is filed rather than the previous 17 years from the date at which the patent was issued. This followed the Drug Price Competition and Patent Restoration Act of the 1980s that restored up to five years of lost patent time spent on pre-market testing and the FDA approval process.
Technology transfer occurs when the patent holder sells a license for the right to use the invention with the threat of legal suit, or when technologies are physically transferred to another country or location along with valuable information such as trade secrets or know-how that the patent does not disclose.
According to Professor Nancy T. Gallini of the University of Toronto, increased patent protection encourages technology transfer since the degree of patent protection establishes the inventor's bargaining power in licensing negotiations. Licensing has been found to be more prevalent in industries where effective patent protection is available, like the biotechnology and chemical industries. Also in the semiconductor industry, which is of great interest as well as concern to Korean businesses, firms that specialized in chip design and outsourced manufacturing tasks emerged after patent protection was strengthened. Increased technology transfers between Korea and the U.S. during the past decade are certainly consistent with Professor Gallini's hypothesis that increased patent protection encourages technology transfer. Gallini states that a stronger legal right to exclude others from using an invention generally provides a stronger economic incentive to include them through licensing.
Some Japanese investors complained in the past that the Chinese side often
unilaterally disclosed drawings to affiliated domestic enterprises or made
copies and sent them to other sectors. For instance, Gould Pumps, the foreign
partner of Nanjing Goulds joint venture, allegedly discovered that the Chinese
partner was manufacturing its own line of pumps using a design almost identical
to the proprietary one Goulds brought to the venture, although the joint venture
contract prevented such practice. The fear of technology leakage may be one of
the reasons why wholly owned subsidiaries, rather than straight licensing, are
more popular in China.
How Much Will Korean Unity Cost?
By Prof. Chang Se-moon
University of South Alabama
MOBILE, Ala. _ Does anyone know how much reunification of the two Koreas will cost? I doubt it. Do we need to know how much reunification may cost? I think so because the cost may influence the future of the ``Sunshine Policy." Is there anything that we can do right now to financially prepare for reunification? I definitely think so.
Cost estimates of reunification have been conducted by several economists. These estimates vary widely, depending on whether the cost refers to the direct budgetary expenditure of the South Korean government, or total economic costs that include private investment as well as government obligations. The cost estimates also depend on whether the reunification is sudden or gradual.
In the gradual reunification scenario, cost estimates depend also on how much the per capita income of North Korean residents should be raised in relation to the per capita income of South Korean residents. Economists usually make the assumption of raising the North's per capita income to 60 percent of the level of the South's. This assumption is based on their belief that 60 percent is the minimum needed to prevent the mass migration of North Koreans to the South when the two economies are reunified. This belief may well be too optimistic.
The costs of reunification thus estimated vary from $150 billion for a sudden reunification to $700 billion or more for gradual reunification. Marcus Noland, for example, 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.
Young-sun Lee, for another example, has two scenarios. In the first scenario, North Korea increases its GDP per capita to 60 percent of South Korea's level within 5 years. Since North Korea's GDP per capita in the base year is 20 percent of South Korea's, the gap is assumed to decline by 10 percent each year, which I believe is simply impossible. The second scenario is based on the assumption that it takes 10 years for North Korea's GDP per person to reach 60 percent of South Korea's, as in Germany. In both scenarios, Lee assumes that 30 percent of total investment comes from the government. The cost of reunification under the first scenario is $182.7 billion in government expenditure and $102.2 billion in private investment, while the cost under the second scenario is $561.4 billion in government expenditure and $85.2 billion in private investment.
These figures are so large that it is highly unlikely that Seoul's policymakers pay any attention to them. It is like the many citizens in Korea who make one million won a month but have no feeling, not even anger, over the billions of won that the sons of former and current presidents have allegedly taken illegally, because the amount of the alleged bribe is so large that ordinary people have no practical sense of how large the amount is.
Let us use our common sense and see what Seoul's policymakers will have to do to financially prepare for reunification. Let us first organize our thoughts. We know that the two Koreas will have to be reunified sooner or later; that we may have no control or premonition about when reunification will occur; that we need a lot of money when reunification happens simply because the North is so poor; that the mass migration of North Koreans to the South is inevitable if reunification comes suddenly; and that reunification costs will be reduced if the North's economy develops through the North's own efforts as well as with assistance from the South under the banner of the Sunshine Policy.
Clearly this is another reason to support the Sunshine Policy, regardless of who wins the presidential election in the South. The economic assistance that the South gives the North through the Sunshine Policy is part of the reunification costs that we would have to pay later.
According to government sources, the South has been spending $110 million annually from 1995 to 2001 in economic assistance to the North. In addition, the amount of trade between the two Koreas was only $18.7 million in 1989 but increased to $425.1 million in 2000. All these transactions are part of the total reunification cost package. The more we spend now for reunification, the less it will cost later on.
Although the closed political system makes it difficult for the North to make any rapid progress in its economy, it appears that it is trying through outreach programs. For instance, North Korea is working with Russia to link the Trans-Siberian Railway to the future Trans-Korean Railway; with Germany for improvements in infrastructure in the areas of communication and railway transportation; with Australia for the mining of non-ferrous iron and magnesite; with the Netherlands for electricity generation; and with Italy for importing machinery for the production of footwear and textiles.
I think North Korea will continue to respond positively to the Sunshine Policy, even if the policy is revised to require some positive responses from the North. This is because the North's economy is in a danger of self-destruction without help from outside. This is also because changes that have so far occurred may well be irreversible. Consider, for instance, an estimate made by Park Suhk-sam who is the chief of the North Korea Economic Studies Division of the Bank of Korea that about 30 percent of North Korean households already own about $964.1 million of foreign currency, of which 60 percent is believed to be U.S. dollars.
Does this analysis mean that the Seoul government needs to do nothing beyond the continuing support of the Sunshine Policy? Not really. Regardless of when and how reunification occurs, it is important for the South to prepare financially for it. Crisis management costs alone are expected to exceed $100 billion, even under the optimistic scenario of reunification.
My suggestion is that the South establishes a trust fund for reunification. A
credible reunification fund with billions of dollars in its account will help
boost public support for continuing the Sunshine Policy. The reunification trust
may be funded not by taxes, but by the collection of all civil fines levied on
those found guilty in South Korea. At any moment in recent years, there were
almost 100 persons who still owed at least $1 million each in civil fines to the
government, with one or two still owing as much as $200 million.
Forget the Dog Meat; I Like Pigs
By Chang Se-moon
University of South Alabama
When I was young, my mother used to buy me dog meat soup, especially during hot summer days. I do not remember why, but my recollection is that, supposedly, the soup was good for my health. When I think about it, I am not sure whether it was the taste of the dog meat or simply the strong spices in the soup that led me to think it tasted good.
After many years had passed, I visited Seoul and my relatives took me to what I was told to be a famous place for dog meat near Nam-han-san-sung (Fort Namhan Mountain). The meal was pure dog meat, with little spice. There was no taste and I simply couldn't eat it. Numerous debates were waged on the Internet in recent years because of the curious, and sometimes unfriendly, comments made by foreigners on the tradition of some Koreans eating dog meat.
The latest debate resurfaced when the foreign media tried to explain interesting Korean culture to those planning to attend the World Cup in Korea. BBC, for instance, stated that some comments in the latest Chancer's Guide didn't go down too well with some South Korean readers, and toned down the issue by stating: ``Yes, Koreans do eat dogs. But it's an exaggeration to say they eat it like we eat beef or chicken. Only a handful of men eat dog, mainly during the summer''(www.bbc.co.uk).
Others are more pointed with incorrect information, such as by defining posintang as ``dog soup made from dogs that are reared to be eaten (not pets), and believed to be good for your health - eating dog is considered a sign of macho prowess in Korea" (ww.lonelyplanet.com). I personally feel that if Koreans left these commentators alone, dog meat would not have attracted so much attention from the foreign media.
In any case, I would like to ask readers to divert their attention from dogs to pigs and learn how much Koreans treasure pigs. Unlike dog meat, that only helps those who eat it, pigs may help anyone who simply see them in his or her dreams. As a matter of fact, there is an excellent story about pigs in Korean culture, which was written by a Professor of Veterinary Medicine, Joo Han-soo, at the University of Minnesota. The following is an excerpt from Professor Joo's story, which was printed in Korean in the December 28, 2001 issue of Seoul National University Alumni News in the U.S.A.
A long time ago, when the universe was created, God also created and kept a pig in heaven. At the time, the pig had a long nose. One day God said to the pig, "Pig, I want you to go to the place where human beings live, and then return after you do something good to them." The pig dutifully went to the place where human beings lived. After a long stay the pig returned to heaven and was asked by God, "What good did you do to human beings?" The pig answered, "I am terribly sorry, God. All I did was to eat food given by human beings and sleep." God was so mad that God picked up a sword and cut off most of the pig's long nose, making it flat and roundish. Pigs are believed to have lived with human beings longer than any other animal. In Korea, it has been at least 2,000 years since Koreans started breeding pigs. In China, the history goes back as far as 10,000 years.
In Ichon, Kyonggi Province, there is a mountain called dotulsan (mountain where a pig cried). One day, a son was climbing down a rock cliff on a tight rope to pick the only herb that his ailing mother needed to survive. While he was going down the cliff, he suddenly heard a pig crying very loud. He followed the crying noise. When he reached the place where the pig's crying came from, he did not see a pig but found that the rope he was holding was about to break into two. The son fixed the rope, picked the herb and was able to save his mother because of the pig's crying.
According to a legend, a pig guided parents of the first king of the Koryo Dynasty, Wanggon, (918-1392) to a place in Songak village where they built a house and had a baby, who later became the first Koryo king.
The village became the first capital of the Koryo Dynasty. Incidentally, the story of King Wanggon became an enormously popular TV series in 2001 and 2002, not only among Koreans in Korea but also among others around the world who were born in Korea.
The tradition of considering pigs to mean good fortune or wealth is also quite prevalent in Western culture. In the West, for instance, a small container in which children save their coins is called a piggy bank. Also, the name of the world's financial center, called Wall Street, supposedly originated from a wall that was built to keep pigs from destroying a corn field in New York. Even in the West, money is associated with a place where pigs flourish.
When people see a pig in their dreams, many Koreans believe that it usually means a good fortunate. Let Professor Joo explain some of what may happen to you when a pig appears in your dream.
If a pig or pigs walk behind you in your dream, money will soon follow you. If a large pig suddenly appears near you in your dream, a rich businessperson will give you financial assistance. If one pig is transformed into many pigs, or many piglets chase a mother pig in your dream, your business will prosper and earn you a lot of money. If a neighbor's pig has a physical relation with your pig or with many pigs in your dream, even if the pigs are not yours, you will have an opportunity to work on a business venture with others or receive many donations when you have some family celebrations.
According to Korean tradition, if a pregnant woman kills a tiger that tries to hurt a pig, she will give birth very easily. For unmarried females, if a pig bites or tears off the Korean traditional skirt, called chi-ma, you will marry a rich man. Wouldn't those visiting Korea from other countries want to buy a traditional Korean dresses for themselves or their daughters?
Finally, more than 40 different types of medicine are made from pigs. In recent years, medical researchers have explored the possibility of transplanting hearts, pancreases, or livers from pigs to cure human illnesses. When pigs can finally do something good to human beings, for example, medical transplants,
Professor Joo believes that God will give the pig back its long nose that was
taken away a long time ago. Are you still talking about dog meat?
Potential Time Bomb of the North Korean Defector Issue
By Chang Se-moon
Univeristy of South Alabama
The recent defection by 25 North Koreans through the Spanish Embassy in Beijing and the five North Koreans who were seen on TV being dragged out of the Japanese consulate in Shenyang by the Chinese police, has pushed the issue of North Korean defectors to the surface.
Defection by North Koreans is not new. As of April this year, more than 1,800 North Koreans have run away from the North and have settled in the South. What is new is the pace of defection. Until the mid-1990s, only a handful of North Koreans defected to the South. The number began rising in recent years with 148 in 1999, 312 in 2000 and 583 in 2001 having settled in the South. In retrospect, the increasing number of defectors was predictable with the successful progression of the South's ``Sunshine Policy."
With the number of North Korean refugees already in China being estimated at 30,000 to 300,000, and with new refugees from North Korea continuing to find a temporary nest in China, the issue of North Korea defectors will only get worse.
What are some real issues? What should be done to defuse the time bomb from being exploded, jeopardizing all the progress that we have made toward peaceful unification?
Consider the existing policies of countries that have a vested interests in resolving the issue. The policy of South Korea toward defectors from the North has been tentative and appears to be to turn defectors away from its own diplomatic missions in China, while accommodating those who take shelter in those of other countries. The Korean Embassy or Consulate General's policy is suspected to be to pay visiting North Korean defectors 100 to 200 Chinese yuan (around $15 to $30) and send them away. South Korea appears fearful of either provoking the North Korean leadership over the issue, or admitting that the issue is too complicated for the government to handle at this time.
The policy of China appears to be to minimize current damage with no clear direction for the future. To the credit of the Chinese government, China allowed about 40 North Koreans who sought asylum in foreign diplomatic missions in Beijing to leave for a third country and eventually for the South. When China sensed the defection issue to be worsening, it invoked its agreement with North Korea by arresting North Korean defectors even from the compound of a foreign mission and by carrying out massive roundups and repatriations of fleeing North Koreans. The Chinese government is also rumored offering 500 Chinese yuan (approximately $63) as a reward to those reporting the whereabouts of North Korean refugees.
Although Japan's problem with the issue is relatively minor one since North Korean defectors use Chinese soil instead of Japanese soil, Japan does not appear to know what to do or what needs to be done. It is sad to hear conflicting stories from Japan as to whether Japanese officials agreed to have the North Koreans taken away, or whether Japan was truly angered over the use of its consulate compound by the Chinese police who violated the 1961 Vienna Convention on Diplomatic Relations.
The policy of the United States appears to deny any refugee status to North Korean defectors, making it unnecessary to provide political asylum for the defectors. The U.S. policy is intended more for practicality than for the principle of human rights. I have no doubt that the U.S. policy would be different if North Korea were located closer to U.S. soil, or if the Korean-American community were much more influential in U.S. politics.
The policy of North Korea, where the defector issue is originating from, appears to be punishment of those who flee the land illegally. The North Korean government is reported to have set aside $200 million to arrest all defectors by April 15, 2003, the next anniversary of the late Kim Il-sung's birthday.
The key issue that leaders of all governments, as well as all concerned individuals, have to realize is that the root cause for North Koreans fleeing the land is more the pursuit of freedom than for the desire to escape from hunger. Some suggest that the provision of ample food and daily necessities would be most effective in keeping them from fleeing the North. This is not true.
Recall the Korean War. The South was not any better off economically than the
North early in the 1950s. In fact, the South's economy was in a worse shape than
the North's economy until the 1960s, and began to surpass the North's economy
only in the 1970s. However, when the opportunity arose during the war, millions
of North Koreans headed toward the South. They did it not for food, but for
freedom. Massive economic assistance may slow down the fleeing North Koreans,
but it would not stop them. Clearly, all nations with vested interests in the
North Korean defector issue need to rethink their policies. If it is hunger that
drives North Koreans to flee their land, these North Korean defectors may not
deserve any more help than all the poor people in the world do. If it is freedom
that drives North Koreans to flee their land for better opportunities, leaders
of several governments will have to find solutions to stop the potential of a
massive exodus from the North. Importantly, leaders in Seoul need to understand
that the Sunshine Policy cannot succeed without resolving the defector issue.
This is because the forward progress of the Sunshine Policy will provide a
greater opportunity for more North Koreans to flee their land. This will
increase the North's behind-the scene executions with no success in stopping the
number of defectors. This may lead to the possibility of the same type of regime
collapse in North Korea that occurred in East Germany, greatly destabilizing the
political landscape as well as the economic health especially of the South. I
don't see a meaningful solution without an agreement between the two Koreas
within the framework of the Sunshine Policy in, for instance, such ways as to
allow a certain number of defectors from the North to the South while ensuring
no reprisals by the North Korean government against those who apply for
migration to the South. If not, the fuse of the time bomb will become shorter
Korea Blessed with Many Good Singers
By Prof. Chang Se-moon
University of South Alabama
Hyun In, one of the greatest pop singers in Korea, sadly passed away on April 13 this year. Songs he made popular for many generations include such cherished numbers as "Sillaui Dalbam" (Sillas Moonlight Night), "Gudseora Kumsun-a" (Be Strong Kumsun), and "Binari neun Gomoryung" (Rainy Hill of Gomo). There are other great old-timers such as Lee Mi-ja, who popularized songs like "Tongbaek Agasi" (Camellia Girl) and "Noraenun Naeinsaeng" (Singing Is My Life).
Kim Heung-gook "59 Nyon Wangsimni" (Wangsimni 1959), the lament of a loner drinking in a bar in Wangsimni, eastern Seoul, while Cho Yong-pil grabbed the top of the charts with "Torawayo Pusan Hang" (Please Return to Pusan Harbor), quickly becoming a favorite at karaoke parlors.
Joo Hyun-mi's "Pinaerin-nun Yongdong-gyo" (Raindrops Falling on Yongdong Bridge) was also a popular hit of the times, despite the Han River bridge in Seoul not appearing attractive enough to merit such a special song named after it. Yoon Soo-il's "Aparta" (Apartment) romanticized the tall, and at the time, unappealing buildings in a somewhat cheerful tome. This song was especially popular among the younger generation.
In comparison, Choi Sung-soo's "Haehu" (Encounter) and "Tonghaeng" (Going Together) plucked at the hearts strings of middle-aged folk. Haehu's two lovers meet in a coffee shop and reminisce the past as if they may never meet again. In Tonghaeng, a lover recalls the many nights longing for a partner to cry together and love together with, sure that there is such a love. How unfortunate these songs are not sung in English.
Tae Jin-a had two hits still dear to pop song fans, "Ok-kyung-I" (Miss Ok-kyung) and "Sarangun Amuna Hana" (Not Everyone Can Love). Assuming Ok-kyung to be the name of the singer's wife, Tae Jin-a recalls difficult days past with Ok-kyung with sympathetic love. In "Sarangun Amuna Hana," the singer affirms the need for a special precondition for two to love, hence the title.
There are other beautiful songs, such as Na Mi's "Sulpun Inyon" (Sad Affair) and Choi Jin-hee's "Sarangui Miro" (Maze of Love). Songstress Choi has a uniquely husky and voluminous voice few can compare with. Then there's the recent song by Song Tae-gwan called "Ne Pakcha" (Quadruple Time).
Someone once said that there was a lot of philosophy in Korean pop songs. Nowhere is this truer than in Song Tae-gwan's "Ne Pakcha." Needless to say, Ne Pakcha is a good trot if you care for a dance.
The level of Korea's new generation of musical entertainers is high, well beyond the imagination of music fans of the 1950s and 60s. I cannot help but admire their talent whenever I hear two female singers in particular sing cafe music; Kim Ran-young and Choi Yu-na. Ran-young and Yu-na, effectively transformed my listening taste toward cafe music.
Both Ran-young and Yu-na sang many similar beautiful songs such as "Hollo Kanun Gil" (Road I Am Walking Alone on) and "Ajikto Mottahan Sarang" (I Still Have Love to Give to You). An essential addition to the collection of any aficionado of Korean culture, "Lipstick Chige Parugo" (With Lipstick Heavily on My Lips) laments the brevity of love like a flower that blooms for a day.
In Korea, it is generally believed 200,000 copies of a music album are needed to be sold to break-even financially. Of about 2,000 new albums released on the market each year, only about 40 are believed to do so.
One of the greatest exports of the U.S. to the rest of the world has been American pop music. With the great talent of the rising generation of Korean entertainers, there is a definite potential for reversing the trend. I see two obstacles. One is the lyric of the songs; should they be Korean or English? I do not know the answer but suspect that it could be easily solved.
The other is that in the U.S., as practiced in Korea also, singers and their
agents give money to radio stations to give their new songs airtime. Annual
expense are believed to range from $250,000 to $500,000, probably because of the
large number of radio stations in the United States. This is a large sum of
money for Korean singers where only a small number of albums break even each
year. This could be overcome by first penetrating American radio stations in
cities where many Korean Americans reside, such as Los Angeles, New York,
Atlanta, Chicago, and Dallas.
Labor Market Participation of Married Korean Women
By Prof.Chang Se-moon
University of South Alabama
MOBILE, Ala-- The percentage of Korean females participating in the labor market is widely known to be significantly lower than other advanced countries. According to the Korea National Statistical Office, the participation rate of Korean women in the labor force was 37 percent in 1963 and gradually increased to 48.3 percent by the year 2000. In year 2000, the participation rate among 20 to 24 year old and 40 to 49 year old females exceeded 60 percent, a figure comparable to other advanced nations.
The low labor force participation rate among Korean women is conspicuously low among females in the age group of 25 to 34, known commonly as the childbearing ages.
According to the Inter-Parliamentary Union, the percentage of women who are members of the lower or single legislative body is highest in Sweden at 42.7 percent and the lowest at zero percent in several countries, including Kuwait, Micronesia, Solomon Islands, and the United Arab Emirates.
Korea is ranked 94th with 5.9 percent. Other countries of interest that are ranked ahead of Korea include Vietnam (17th at 26 percent); China (29th at 21.8 percent); Philippines (42nd at 17.8 percent); U.S. (53rd at 14 percent); and Japan (86th at 7.3 percent). Interestingly, North Korea ranked 34th in the survey with 20.1 percent.
To encourage more Korean women to join the labor market and to reduce gender inequalities in terms of employment and pay, the Korean government recently established the Ministry of Gender Equality. A report titled Women Korea, prepared by McKinsey & Company, concluded that Korea must make full use of its female workforce to truly become an advanced nation.
Why are Korean women of childbearing age less likely to participate in the labor market?
Since the 1960s, labor force participation by females increased in most advanced countries. Factors cited in academic literature as having contributed to this increase include lower fertility rates, new household appliances, improved education levels of females, growth of the childcare service industry, reduced pay gap between male and female workers, the expansion of service sector jobs, increased availability of part-time jobs, and changes in social norms.
Most of these factors appear to have occurred in Korea also. The Korean economy grew at an average annual rate of 5.9 percent during the past 30 years, raising household income levels significantly, and allowing households to enjoy modern household appliances.
Wage differentials between male and female workers in Korea do not appear much greater than those of other countries, although the differences do narrow as the level of education increases. Female education levels have increased in Korea, while fertility rates fell from 4.5 in 1970 to 1.5 in 1995.
There has also been a rapid increase in the service sector as well as part- time jobs in Korea. Why, then, are Korean women of childbearing age less likely to participate in the labor force?
Professors Jang Soo-myung of the Korea Educational Development Institute and Lee Bun-song of Seoul National University hypothesized in their presentation during the January 2002 meeting of the Korea-America Economic Association, that Korea is at an advanced stage economically, but at an intermediate stage culturally.
Jang and Lee argue that Korea's traditional belief, as still held by many in Korea, that women should be married and married women should stay home, is the dominant barrier to increasing female participation in the labor market.
Put differently, Korean society is dominated by males who are against females of childbearing age from working, while married women have higher reservation wages than the labor market is willing to provide.
In other words, many married females feel disinterested in working at the wage levels offered to them. Other things being equal, Jang and Lee have found that married women aged 21 to 30 are less likely to participate in the labor market by 60 to 90 percent than their married counterparts. Note also that during the 1997 financial crisis, Korean firms prioritized the sacking of the wives of husbands working in the same company over their husbands.
Perhaps underlying all these observations is the fact that population densities in Korea are so high in relation to its economic capacity, that the demand for workers has not increased high enough to break the social norms against married females of childbearing age from working, or to offer high enough wages to meet reservation wages of these females.
During World War II in the U.S., for instance, demand for employees was so high that many females entered the labor market for the first time and remained in the work force after the war ended, significantly boosting the labor force participation rate of American females.
One interesting question is: Can, or should married Korean women do anything about the low labor force participation?
Assuming that the primary objective of public policy is to maximize society's happiness, what the government can and should do is to make sure that married females have an equal opportunity to access the labor market through legal mandate of non-discrimination of any kind against married females.
This is not an easy task and requires enormous efforts from the policymakers of the public sector as well as the upper level managers in the private sector.
Any campaign beyond the legal protection of non-discrimination against married females such as educating the public for thinking outside the traditional belief of married women staying home may be better off if it is left to the market system that can do the job more effectively than the public sector.
This suggestion is corroborated by Jang and Lee's finding that in Korean
cities where education, public service and medical service jobs that many female
workers find attractive are located, the participation rate of married women in
the labor market is significantly higher.
Around the World in Half An Hour
By Chang Se-moon
Professor of University of South Alabama
MOBILE, Ala.--You wake up in a house built with Canadian lumber and throw back your sheets made in North Carolina. You put on your trousers assembled in Dominican Republic, a shirt made in China, and shoes made in Italy. You spray on perfume made in France. Your American coffee maker, made with parts from Mexico and Canada, brews Columbian coffee. You grab an Ecuadorian banana, a Florida orange, and some cold Wisconsin milk. You turn off your Korean TV broadcasting news via an American satellite orbiting the earth.
You grab your carry bag made in Vietnam and hurry to your car made in Korea, or maybe to a Japanese car made in Kentucky with parts from California, Arizona, Missouri and West Virginia. You check your watch made in Switzerland. 12 countries in 30 minutes. No wonder you are late.
It is so easy to forget the past. It wasn't that long ago when coke was a cold drink, pot was something you cooked in, bunnies were small rabbits, a chip was a piece of wood, AIDS were helpers in the principal's office, and "Made in Japan" meant junk.
Welcome to the World Cup finals in Korea. Global Korea showcases the new Incheon International Airport, skyscrapers, exports of quality products, and fancy soccer stadiums for your enjoyment. It wasn't that long ago, however, when Korea was totally devastated by an attack from the North in June 1950.
The long recovery from the war damage began with a truce signed in June 1953. The first president of Korea was Syngman Rhee. Rhee's struggling administration was toppled by a massive demonstration of students in April 1960. The April 19, 1960 revolt by students eventually provided a pretext for the military coup in May 1961 that led to many years of military dictatorship until 1992 when a president was finally democratically elected.
The May 1961 military coup was led by Park Chung-hee, who was officially "elected" as president in December 1963. Some scholars give President Park credit for his selective support of export industries as being the foundation of today's prospering economy. In January 1965, Korea became one of a few allies of the United States that sent troops to Vietnam.
In June 1965, a monumental event took place with the resumption of a diplomatic relations between Japan and Korea. The resumption was achieved by the signing of the 1965 Korea-Japan Agreement, known also as the 1965 Japan-Korea Agreement, especially outside Korea.
Importantly, the agreement is still shrouded in controversy because the agreement never did clarify the rights of individual Korean victims of forced labor and sexual slavery by the Japanese authorities during the 1930s and 40s. As recently as this year, hearings were being held on these issues at the United Nation's Human Rights Commission.
The 1970s had been relatively quiet and the economy started marching toward growth spearheaded by President Park's policy of import substitution. Some businesses took advantage of government loans to become conglomerates, called chaebol in Korea, through the support of government officials, thus paving the way toward what is now known as crony capitalism. The economy grew, however. Telephones were made available to middle class households and high-rise apartments, called apart in Korea, began appearing everywhere.
In October 1979, President Park was assassinated. Following a brief and inept civilian government, Chun Doo-hwan was "elected" in August 1980 as the second military president. President Chun was followed in December 1987 by the third, and hopefully the last military president, Roh Tae-woo, who officially assumed the post in February 1988. The Summer Olympics were also held in Korea in 1988.
In December 1992, Kim Young-sam was elected in a democratic way as the first civilian president after the three presidents from the military. In July 1994, North Korea's long-time dictator Kim Il-sung died and was succeeded by his son, Kim Jong-il.
President Kim Young-sam's Administration arrested former presidents Roh in November 1995 and Chun in December 1995 for having amassed hundreds of millions of dollars illegally while they were presidents.
Although they were found guilty as charged, they were soon released with little civil fines to show to the public. These episodes convinced many hard-working Koreans, who had made the Miracle on the Han River possible, that "crime pays" and that the long-held cynical belief that the "law applies only to the poor" was more true those days than ever before.
In November 1997, Korea requested financial assistance from IMF to solve the worst financial crisis the Korean economy had faced since the end of the Korean War. Korea made numerous structural reforms to safeguard its economy from future external shocks, and to the surprise of many scholars, made a complete recovery only about a year after the onset of the crisis.
In February 1998, Kim Dae-jung was democratically elected president, succeeding Kim Young-sam. In June 2000, there was a historic summit between President Kim Dae-jung of the South and Chairman Kim Jong-il of the North, cementing the groundwork of the brilliant Sunshine Policy that eventually won President Kim the Nobel Peace Prize in December 2000.
With all the problems and difficulties that Korea has faced, no one can deny that Koreans are hard-working, resilient, and determined to succeed.
Everyone in all developed societies enjoys numerous amenities in the morning,
experiencing a trip around the world in half an hour, and the experience these
days always includes a couple of stops in Korea.
Incentive Packages for Hyundai's Plant in Alabama
By Prof.Chang Se-moon
University of South Alabama
MOBILE, Alabama--On April 2, Hyundai Motor announced that it has selected an Alabama site for its new assembly plant in the United States. Readers may wonder what incentives attracted Hyundai Motor to Alabama, instead of to the site in Kentucky. I can answer the question.
The economic incentives that Alabama promised Hyundai Motor comprised of six categories: site improvement, transportation improvements, worker training, private economic incentives, tax incentives, and miscellaneous incentives. I will explain each of the six.
The estimated costs of site improvement are $55 million, which includes site purchase and development ($34 million) and water & sewer improvements ($21 million). Both the state and local governments will share these expenses.
The costs of transportation improvements are estimated at $29 million, which includes improvement of a local road leading to the site ($9 million); improvement of U.S. Highway 80 near the site ($14 million); and an access road to the Interstate 65 interchange ($6 million). These expenses will be borne mostly by the state government.
The estimated costs for worker training are $61.8 million, which include funding for a training facility ($7 million) and training equipment ($54.8 million). These expenses are borne entirely by the state government.
The total amount of private economic incentives is around $18.2 million, which includes electrical improvements ($6 million); natural gas improvements ($4 million); telecommunication improvements ($200,000); and rail expansion ($8 million). All these private incentive expenses will be funded by the private sector such as utility companies.
The tax incentive amounts are net present values, not annual benefits, based upon a 20-year calculation using a 7 percent discount rate. The total tax incentives are $76 million, which includes state & local property tax abatement ($26.9 million); state & local sales tax abatement ($18.6 million); mortgage records tax ($1 million); corporate income tax credit ($29 million); and city building permit fee abatement ($1.25 million).
Miscellaneous incentives amount to $12.1 million, and include advertising through the nationally-recognized Retirement Systems of Alabama ($10 million); housing assistance program through the Alabama Housing Finance Authority ($1 million); Alabama project coordinator ($450,000); Alabama Korean Office ($450,000); Montgomery project coordinator ($150,000); and Foreign Trade Zone ($50,000).
Adding all up, the total amount of incentives promised to Hyundai is $252 mil. of which government sector incentives account for 88 percent of the total incentive package and private contributors account for 12 percent of the total. The break-even point for the project is estimated to be 2011 for state and local government investments.
How do these numbers compare to other investment incentives offered by Alabama for previous automobile plants? Honda, which began producing Odyssey minivans in 2001, received $158 million from Alabama in incentives for its $580 million plant. Honda initially promised to hire 1,500 workers, but that number is projected to increase to 2,300 since it began production. Toyota is building a $220 million engine production plant in Alabama and received about $29 million incentives from Alabama.
Mercedes Benz built a plant in Alabama in 1994. Initially, Mercedes Benz planned to assemble 50,000 M-class SUVs, but the number increased to 80,000 this year and is projected to exceed 100,000 per year. For its investment, Mercedes Benz received $253.3 million incentives from Alabama. Importantly for Hyundai, Mercedes Benz received an additional amount of government ($119 million) when it made a major expansion in recent years.
Bits and pieces of stories behind negotiations started leaking out, especially from Kentucky officials who were disappointed. These stories are educational to say the least. According to April 6 issue of the Mobile Register, Hyundai made a series of last-minute requests to Kentucky officials, which included: (a) a guarantee that Hyundai would be exempt from changes to the state's tax laws made by state legislators in future years; (b) Kentucky paying for the cost of moving a high-power interstate electric transmission line from a corner of the property; (c) guaranteed approval by the state of required air, sewer and water permits; (d) establishment of an exclusionary zone that would prevent any other smokestack industries from locating within 10 miles of the plant; and (e) the state's guarantee that utility providers meet Hyundai's requirements.
Based on my own work in industrial development, I can see that items (b) and (e) can be accepted although they are not directly under the state's jurisdiction in Kentucky or any other state in the United States. Utility companies usually do their best to cooperate with state officials because new industries are their new customers.
Item (d) is also a reasonable request because smokestacks within a short distance may damage the paint of new cars. I heard such a complaint when I visited an automobile processing site at the Port of Jacksonville in Florida.
The only promise that Kentucky or any other U.S. state can make regarding item (c) on various permits is to request speeding up of the process. Even if agencies issuing such permits belong to the state government, state officials including its governor cannot pressure agency officials to issue permits if qualifications are not met.
The Item (a) on protection from future tax increases is interesting. I can understand why potential investors like Hyundai would like to have such assurance. Such request, if it is actually made, is neither advisable, nor likely acceptable to state officials in the United States. The reason why such request is not advisable is that tax increases in general are difficult to pass, making such a request academic in most cases. More importantly, such a request makes potential investors appear as if they do not want to be a part of the community in which the plant is located. Even if a promise is made, there is also a question of whether such a promise can be enforced since all taxation issues are subject to legislative approval in the United States.
In my previous article on Hyundai plant, I mentioned the Howlett family who
owned 111 out of 1,600 acres of land Kentucky tried to purchase for Hyundai.
They wanted as much as $10 million for their land even if the land was appraised
generously at no more than $1 million. Kentucky agreed to pay, and the Howlett
family agreed to sell the land at $6 million for the Hyundai plant just hours
before Hyundai made its announcement to go to Alabama. The price tag of $6
million for 111 acres of rural land is outrageously high, but shows how much
Kentucky officials wanted the Hyundai plant.
Hyundai Motor's Decision Between Hope Hull and Glendale
By Prof.Chang Se-moon
University of South Alabama
MOBILE, Alabama _ Hyundai Motor is expected to make its final decision on the location of the company's first assembly plant in the U.S. very soon. The two candidate locations are Hope Hull of Alabama and Glendale of Kentucky.
Newspapers in Alabama and Kentucky report the news surrounding the decision almost on a daily basis, attracting wide attention from political leaders as well as residents in and near the two communities.
Both Hope Hull and Glendale are located along the I-65, an interstate highway that begins in Mobile, Alabama, and ends at the foot of Lake Michigan near Chicago. I-65 had been known as the Snowbird Express because many northerners, called snowbirds, traveled along I-65 to southern states during winter to migrate to warmer places in Alabama and Florida. These days the I-65 is known more as the Auto Alley because many new automobile assembly plants are being located along the highway.
Both places are near large cities with Glendale 40 miles south of Louisville and Hope Hull only five miles south of Montgomery. Both places are near airports, with Louisville International Airport for Glendale and Montgomery Regional Airport for Hope Hull. Both states boast other successful automobile assembly plants with Toyota in Kentucky and Mercedes Benz in Alabama.
Residents of both places state that theirs are laid-back towns. Neither hectic traffic nor pressure of any kind affects them; just an easy and slow-paced life with no town hall, no courthouse, no mayor, and no what have you. Both towns support a church and a restaurant or two.
Glendale is best known for the Glendale Crossing Festival, which attracts nearly 30,000 visitors on the third Saturday of each October to pick over the handiwork of about 400 vendors, according to a March 23 Associated Press report.
Residents at Hope Hull all agree that the Hyundai plant, if settled at Hope Hull, would be good for Hope Hull and Alabama, according to a March 21 article in the Mobile Register. Support from local residents is equally strong at Glendale, according to an AP report, although some storeowners at Glendale expressed an understandable apprehension. Newspapers in both states printed editorials supporting the location of the Hyundai plant in their state.
There is also an interesting connection between Hope Hull and Kentucky. A horse named Hoop Jr., bred in Hope Hull, won the Kentucky Derby in 1945.
If Hyundai Motor decides on Hope Hull, the company is riding into a town with an interesting legend. Some say that in the late 1820s, Mr. Hull rode into town and delivered a sermon so powerful that everyone who heard the sermon was spellbound, and town residents built him a church and renamed the town in his honor as Hope Hull. Ultimately, Mr. Hull was found to be a fraud and was run out of town on a rail but the name of the town, as the story goes, remained the same.
There are some advantages that are unique to Glendale, while there are other advantages that are unique to Hope Hull. One critical factor in Hyundai Motor's final decision may well be how strong is the support for the project from state leaders as well as among residents.
On March 21, Alabama legislators passed an incentive package worth up to $118.5 million for Hyundai Motor, which was quickly signed by Alabama's Governor Don Siegelman. What is important is not that the incentive package passed, but that the package passed with a vote of 95 to 0 in the House and 24 to 0 in the Senate. Alabama legislators made a strong statement in support of the project. Unanimous support for anything is rare in American politics.
The incentive law, which is designed to develop a worker training center specifically for Hyundai Motor, is only a part of the total incentive package that will be offered by Alabama. There are other incentives. For instance, Alabama does not have to pass a separate bill to authorize or pay for corporate income tax breaks. Alabama officials are reported to have already set aside funds to prepare the 1,600 acre site at Hope Hull.
I am sure that Hyundai Motor's interest will be well represented by the Alabama law firm, Bradley Arant Rose & White that Hyundai Motor hired. It is the same law firm that represented Alabama in negotiations with Mercedes-Benz when the firm selected an Alabama site for its M-class SUV production in 1994.
It is difficult to know how much Kentucky has in mind or whether the level of support for Hyundai Motor in Kentucky is as strong as it is in Alabama. This is because Kentucky officials have stated that their governor has the authority to prepare incentive packages without presenting them to the state's legislature. It is not clear, however, whether incentive packages will have to be approved by Kentucky legislature later, assuming that Hyundai Motor and Kentucky officials agree on a package. This may well be a big uncertainty that Hyundai officials may not be willing to gamble on. Kentucky officials have said that the state is prepared to spend $26.5 million to widen a highway leading to the Glendale site.
It is my observation that the primary concern of Korean manufacturers who consider direct investment in the U.S. is the availability of land. Kentucky and Alabama are both offering a 1,600 site. Unlike Alabama, there are some red flags raised in the Kentuckian commitment to making the land available for Hyundai Motor.
In one case, Kenneth Floyd who lives in the Glendale area filed a lawsuit claiming that he signed an option to sell his land for about $3,500 per acre but found later that his neighbors were offered $8,000 to $12,000 per acre, which I believe is a price too high for rural land. The lawsuit was settled quickly.
There is also a 111-acre land parcel, located within the 1,600-acre site that
Kentucky officials are trying to acquire for Hyundai Motor. Norma and Paul
Howlett, who own the land, refused to sign any options. According to March 19
article in Mobile Register, Kentucky offered $1 million for the land but the
Howletts countered by saying that they would be willing to sell the land for $10
million. Under state laws, states can offer a fair price and take the land away
from its owners through the process known as the condemnation. The Circuit Court
of Hardin County in which Glendale is located appointed three commissioners to
move forward with the condemnation.
Korean Victims of World War II
By Prof.Chang Se-moon
University of South Alabama
MOBILE, Alabama-- Monterey County is located in the central Pacific coast of California. Monterey is best known for its Pebble Beach golf course, arguably the most beautiful, if not the most expensive, golf course in the world. Monterey County also boasts of a small city called Carmel with many precious stores in which Clint Eastwood once was the city's mayor.
On February 19, 2002, the Board of Supervisors of Monterey County unanimously approved a resolution of special interest to Korean victims during World War II.
The resolution is symbolic, but is also something that Japanese leaders may wish to learn from with their involvement in numerous lawsuits filed by Korean victims of World War II against Japan and Japanese businesses. Let me elaborate.
Exactly 60 years ago in February during the early years of World War II, President Franklin Roosevelt ordered 28,000 Japanese Americans to internment camps. When these Japanese Americans were about to be released from the camps in 1943, the then Board of Supervisors of Monterey County passed a resolution "vigorously and earnestly" opposing the release.
This earlier resolution was discovered by Sandy Lydon, a local historian who brought it to the attention of a local Japanese American, who in turn asked county supervisors to have it revoked.
The new resolution adopted on February 19 rescinded the 1943 resolution. Lawsuits by Korean victims of World War II against Japan and Japan's businesses have a long history with the first one having been filed in 1972 by Sohn Jin-doo who requested compensation for the injury that he received from the atomic bomb explosion in Japan.
Numerous lawsuits by Korean victims of World War II have been filed against Japan and Japanese businesses since 1972, requesting compensation for forced labor without pay and for pain and suffering by comfort women.
So far not a single case is known to have been won by any of these victims. No less than 724,727 Korean workers were taken to Japan, Sakhalin and southern Pacific islands as forced labor. In addition, more than 200,000 mostly Korean and some Chinese and Philippines women were forced into sexual slavery for Japanese troops as "comfort women".
There are some cases in which the lawsuits were settled without reaching trial. In July 2000, Nachi-Fujikoshi Corp. in Toyama, Japan reached a settlement of a lawsuit that two women (Lee Jong-suk and Choi Bong-nyon) and one man (Ko dok-jwan) of Korea filed in September 1992 in Japan. This is the third settlement, but the first one settled at the Japan's Supreme Court. The Japanese company did not offer any apology.
Approximately 60 lawsuits seeking payment for forced labor during the war are being heard throughout Japan.
Lawsuits against Japan and Japanese firms have also been filed in U.S. courts by Korean victims of World War II.
In one lawsuit filed by 15 former "comfort women" victims (Hwang Geum-joo et al v. Japan), U.S. District Court Judge Henry Kennedy in Washington DC ruled against the plaintiffs not because "unquestionably barbaric" acts of Japanese soldiers were justifiable, but because U.S. Federal Rules of Civil Procedure required its dismissal.
The Bush administration supported the Japanese cause by filing in April 2001 a formal request to the court asking that the case be dismissed by claiming that Japan should be shielded from the lawsuit by sovereign immunity. The case on forced labor, cited as Jeong v. Onoda Cement has a different twist, however. On September 14, 2001, Honorable Peter D. Lichtman of the Superior Court of California for the County of Los Angeles refused to dismiss the case by rejecting arguments by the Japanese companies and the Bush Administration that the claims by the plaintiff are waived by the 1951 Treaty of Peace between the United States and Japan. The case is in progress. For cases filed in Korea and Japan, there is a wildcard in that the 1965 Japan-Korea Agreement that led to the resumption of diplomatic relations between the two countries did not make clear the existence of the rights of litigation by individual Korean victims. It is unfortunate that Korean officials under the Park Jung-hee military regime who negotiated the Agreement did neither clarify nor protect the rights of the Korean victims of World War II in the eyes of the law.
Let us set aside legal disputes. We may recall that the rights of the European victims prevailed and eventually led to $5.2 billion settlements from Germany; that last year the Japanese Asian Women's Fund paid Dutch "comfort women" for being forced into sexual slavery in Indonesia during the war; and that even in Japan there was a ruling, although reversed on appeal last year, ordering Japan to pay compensations to the "comfort women".
We may also recall that Japan was totally outraged about an alleged rape of an Okinawa woman by a U.S. soldier. Shouldn't Korea have a right to feel much greater outrage than some Japanese felt when the alleged rape occurred in Okinawa?
I know life goes on. All of former "comfort women" will eventually pass away perhaps to the satisfaction of Japan's so-called leaders who do not want to admit their past sins and Korea's government officials in the 1960s whose vision, if there was one, was so short that they forgot to clearly protect the legal rights of Korea's war victims. Being a weaker of the two nations, current leaders of Korea will not be in a position to force Japan to compensate and apologize to Korean victims during the war.
I also know, although my emotions do not allow me to articulate, that there is a difference between what the Board of Supervisors of the Monterey County did in unanimously passing the February 19 resolution and what the current Japanese leaders are doing in their efforts to defeat moral responsibilities by legal technicalities.
I feel sad in not being able to do more for the Korean victims during the war
than just wish that political leaders of Japan and Korea work together to settle
the compensation issue outside the courtrooms before they all pass away with
their feelings of helplessness.
Bush Doctrine and Future of Korean Economy
By Prof. Chang Se-moon
University of South Alabama
In his recent State of the Union address, President Bush singled out Iraq, Iran and North Korea as an axis of evil. A similar comment has also been made by Admiral Dennis G. Blair, who is the commander-in-chief of the U.S.
Pacific Command, during a recent breakfast lecture organized by the American Chamber of Commerce and the Korean-American Association at Seoul's Hilton Hotel. Admiral Blair has stated that North Korea poses a potential threat to world security and peace.
Since President Bush will visit Korea later this month and since political arrangements directly influence economic relations between the two Koreas, this may be a good time to review the meaning of what appears to be America's new doctrine of pre-emption and explore what the Korean government may wish to consider in preparing for the coming summit between President Bush and President Kim.
Most importantly, Korea needs to remind President Bush of the scary reality that the distance between Seoul with 15 million people and North Korea's military is not much farther than the distance between Washington D.C. and the Dulles Airport. Any miscalculation by either side will result in a catastrophe of human lives.
Like President Bush as well as most people in Korea, I feel frustration and disappointment at the slow and erratic pace North Korea has exhibited in responding to President Kim's sunshine policy.
My theory is that the leaders of North Korea at this juncture of history are concerned almost exclusively with the survival of their power, not with terrorizing other nations. They know that their economy is in a terrible shape and needs outside help desperately. They know that the outside world is rapidly changing with the globalization movement everywhere. Because of their total dictatorship, however, they do not know exactly how to promote economic development and, more importantly, how to respond to the changing world without losing control over the country.
A terrorist North Korea would not have signed an agreement with the U.S.to abandon their nuclear weapons program in 1994. A terrorist North Korea would not have agreed on the historic summit with the joint declaration in 2000. A terrorist North Korea would not have agreed in 2000 to exchange with South Korea those families separated since the 1953 end of the Korean War. A terrorist North Korea would not have entertained a visit from U.S.Secretary of State in 2000. A terrorist North Korea would not have allowed tourists to visit Mt. Kumkang during the past two years.
North Korea is like a lady who is considering a proposal but is far from being ready to marry. It is not a good idea to push the reluctant lady into a quick marriage as some leaders of the Korean government have been trying to do because there is no reason why the peace process has to be completed during the current administration of Korea. Nor is it a good idea to turn the lady away by calling her a terrorist as President Bush did because the current peace process has to continue no matter how slow the process may be.
Please understand that history will treat President Bush kindly for his skillful and excellent handling of the fight against terrorism and President Kim for his extraordinary courage in initiating a dialogue with North Korea against all odds. History will continue to treat both presidents nicely even if the job of converting North Korea to one of the free nations is left for future presidents to complete.
The reality appears to be more optimistic, however, as implied in Admiral Blair's statement that "we need to take advantage of the threat as an opportunity to bring forth reconciliation and create a new framework of regional security on the Korean peninsula." To develop a new framework of security and economic development between the two Koreas, there are a couple of issues that need to be considered.
First of all, the Korean Embassy in Washington needs to do a better job of convincing President Bush and his advisors of the importance of understanding the dilemma faced by the leaders of North Korea in adjusting to the free world, of comprehending the consequence of any military confrontation in human lives, and especially of being patient in moving the peace process forward. Unlike terrorists in Afghanistan, the problem of North Korea is much more complicated than what the Bush administration appears to believe.
Secondly, the Korean government needs to understand how President Bush's approach may affect Korea's efforts to speed up the peace process.
President Bush's labeling of North Korea as an axis of evil may actually help the South's efforts in reaching out to the North.
Consider the premise of this article that all parties are rational in their own ways. Leaders of the North have in the past attempted to bypass the South and have direct negotiations with the U.S., obviously believing that the North can gain more by negotiating directly with the U.S. than through the South. Unless changed by future contacts between the North and the U.S., the tough approach by President Bush leaves two alternatives to the North; isolation or efforts to improve communication with the South.
Being rational in their own way, current leaders of the North will choose greater efforts to improve communication with the South rather than return to isolationism. The response by the North to the recent subsidy proposal on the Mt. Kumgang tour project in inviting tourists to visit their Arirang Festival in their capital city during the coming summer in 2002 is evidence, albeit small, that leaders of the North are trying to make rational decisions for their own self interests.
Overall, leaders of the Korean government in Seoul have done very good work
in inducing the North to open their doors. I encourage current and future
leaders of the Korean government to continue their confidence building efforts
by encouraging more joint projects for mutual economic development. I also
suggest the Korean government and its Embassy officials in Washington to do a
better job in making President Bush and his advisors understand the complexity
of the issues unfolding in the Korean peninsula as well as the importance of
continuing economic cooperation with the North.
Proposed Subsidies to Mt.Kumgang Tour Needs Sunset Provision
By Prof. Chang Se-moon
University of South Alabama
MOBILE, Alabama _ The recent announcement by the Seoul government that it plans to provide a package of financial assistance to Hyundai Asan's Mt.Kumgang tour project presents an another opportunity to review how the sunshine policy is progressing.
As expected, this announcement attracted strong objections from the leaders of the opposition parties, including Kim Jong-pil, who is reported to have said, ``We will never allow the government to inject public funds into the Kumgang tour business.'' From the view of those opposed to the new assistance proposal, the project is an endless pit for tax money, which returns almost nothing to the South.
From the view of the government as well as supporters of the proposal, however, the Mt. Kumgang tour project has been regarded as the prime symbol of President Kim Dae-jung's sunshine policy of engaging the North in a peace process. This means that the project cannot be judged solely on monetary benefits and costs. Benefits should include continuing peace that cannot be measured in monetary terms. The subsidy represents a small investment in ensuring the peace that we all enjoy.
There is no doubt that Mt. Kumgang tour project is a very good idea and complements the peace process that President Kim has been pursuing under the sunshine policy. What many may wish to know is just how much the South should pay for the good idea.
After losing hundreds of millions of dollars from the project within the past three years, it may be important for the Seoul government to re- evaluate it. I said the Seoul government rather than Hyundai Asan, since Hyundai Asan would not be able to continue the project without help from the government.
First of all, one important question relates to whether the obviously faulty contract with the North can be revised in such way that financial benefits to the North are tied to the financial success of the project.
Guaranteeing payment of a large amount to the North regardless of the success of the project is neither wise nor sustainable. This is because guaranteed payment that is not prorated in proportion to the project's financial success does not provide any incentive for the North to seriously cooperate with Hyundai Asan. If possible, the contract should be revised in ways that would provide financial returns to the North based on the project's financial success.
Secondly, I expect the subsidy program to be implemented soon, since the policy has already been announced. I think the program should be implemented since the Seoul government has already announced it.
Economically speaking, however, it would make sense if the subsidy program contains a sunset provision that will automatically terminate the program in a year or two unless it is renewed. The program will then provide a period during which all parties can work toward finding a lasting solution.
Thirdly, I think leaders of the North are rational in their own way. They simply have not experienced enough to realize how silly their decisions sometimes look from the outside. For instance, the North's suspension of all exchange programs and negotiations between the two Koreas following the U.S. decision to enhance anti-terrorism security measures in the South and the rest of the world is childish and they know it. This is why the North responded positively to the proposed subsidy, and extended an olive branch to the South by allowing Mt. Kumgang tourists to visit Pyongyang for the April 29 to June 29 Arirang Festival. The North's leaders are rational enough to demand that Seoul assist Hyundai Asan in paying its fees, which has been a major source of hard currency to them. Leaders of the North may yell at the suggestion of a new contract negotiation, but will respond to it since the alternative will mean no money for them.
In the fourth place, the new assistance package has been reported to include government subsidy for tour fees for some groups such as students on school excursions, teachers, and people who have relatives in the North.
Some speculate a tour subsidy of around 200,000 won for first-generation separated family members and 100,000 won for students on school trips in contrast to the current 400,000 or so won for a three-day visit to Mt.Kumgang.
Assuming that all members of separated families and students are considered to receive tour subsidies, my suggestion is that subsidies should be made only to those members of the first-generation separated families and students whose income levels are low. My understanding is that there are many wealthy separated families and families with school children. A blanket subsidy to all members of separated families and all students on excursion trips, regardless of their income levels, would be an unfair distribution of money and a waste of tax revenues.
Hyundai Asan apparently plans to expand the number of lodgings at the Mt.Kumgang site as it expects more tourists to visit Mt. Kumgang following the government's announcement of financial support for the project. Hyundai Asan may also plan to establish duty free shops at the Onjonggak Rest Area and Hotel Haekeumgang. Hopefully, all these expansions take place in conjunction with new contract negotiations with the North, as well as with a sunset constraint of the proposed subsidies.
Finally, it would be nice to see a constructive dialogue between the Seoul
government and leaders of the opposition parties on the subsidy issue. The idea
merits consideration. Continuing the Mt. Kumgang tour project is very important
for the continuing dialogue between the two Koreas, but not at all costs.
Saga of David Chang and Senator Torricelli
By Prof. Chang Se-moon
University of South Alabama
MOBILE, Aalabama _ The announcement on January 3, this year, by U.S. Attorney May Jo White that her office has ended its investigation of Torricelli's campaign financing without indictment presents an opportunity to review the wrong way Korean and Korean-American businesses are soliciting help from American politicians.
In 1999, David Chang and Robert Torricelli, an U.S. Senator from New Jersey, traveled together to a meeting with the then Prime Minister Kim Jong-pil. At the time, Chang wanted to buy the Korealife Insurance Company, which was under the control of the Korean government. Chang allegedly showered Senator Torricelli with such fancy gifts as hand-tailored suits, a Rolex watch, and envelopes stuffed with cash in exchange for Senator Torricelli's help with the insurance company deal in Seoul.
The story gets nasty from this point.
On January 21, 1997, a federal grand jury issued the first of at least four subpoenas to Chang and his New Jersey companies as part of a federal investigation into the business dealings of Chang's attorney, Berek Don. On February 5, 1999, Berek Don pleaded guilty to illegally steering $11,000 from Chang to Torricelli's campaign fund.
On December 10, 1999, Chang was arrested and charged with obstructing the grand jury investigation. Although he was released the following week, he was indicted later on charges of campaign finance violations.
On June 1, 2000, Charles Koo, president of another New Jersey company, pleaded guilty to funneling $20,000 of Chang's money to Torricelli's campaign. The next day, on June 2, 2000, Chang pleaded guilty to steering $53,700 in illegal contributions to Torricelli's campaign fund.
On April 18, 2001, Torricelli strongly denied that he had broken any law following a report that he received unreported gifts of cash, jewelry, and Italian suits.
The long-running Justice Department investigations ended on June 3, this year, when U.S. Attorney White ended the investigation and turned the case over to the U.S. Senate Ethics Committee.
Here the story gets nastier.
Chang is awaiting sentencing for his June 2, 2000 guilty verdict on illegal campaign contributions. Chang has been cooperating with prosecutors allegedly for leniency in sentencing by claiming that he gave gifts to Torricelli in return for the senator's help in business dealings involving the governments of both Koreas.
Chang has even accused Torricelli of trying to kill him. According to a Bergen County website. Torricelli's lawyers expressed their own opinions that were rather unfavorable to Chang.
Torricelli's legal team described Chang as a pathological liar and an admitted perjurer, and have claimed that Torricelli is totally innocent, being falsely accused by a nutcase.
Torricelli has claimed that he provided only routine constituent services to Chang, but has not denied receiving gifts from him.
The Washington Post's Susan Schmidt reports the claim made by Torricelli's attorneys that ``Chang has asserted he made illegal payments to others, including former Treasury Secretary Robert Rubin, and that former President George H.W. Bush is a silent partner in his business.'' Torricelli's legal team concludes by saying that ``Chang's claims to investigators have grown increasingly fantastic.''
What went wrong?
Most likely, the main problem in the story of Chang and Torricelli is that some Korean businesspeople working in the U.S. behave in the same way they behaved in Korea, with little respect for the laws.
It is important to remember that money and power work in the U.S. but only within the environment that the laws allow.
It is important for leaders of Korean businesses operating in the U.S. to maintain contacts with political leaders in the U.S. because many important decisions are made in the Congress. Contacts with political leaders should be made within the legal bounds if these contacts are to remain strong for many years.
When the Korean consulate general in Atlanta visited Mobile, for instance, we had a luncheon and one of the guests was the chief of staff of the Congressman representing the Mobile area, whom I, as well as several American participants of the luncheon who are friendly with Korea, maintain a good relationship with. The small gift that the consul general brought was more symbolic than anything else with little, if any, market value.
The meeting was in such a healthy environment that all participants of the luncheon freely expressed any opinions they had. We departed with mutual respect.
As last year's Nobel Laureate, Joseph Stiglitz, stressed early in January in Atlanta's meeting of economists, Korean businesses and Korean-American businesses need to cultivate a strong respect for laws. The Korean economy is rapidly maturing, leaving behind the days of hit and run operations.
The progress of the Korean economy can only be sustained if we obey the laws of all nations in which we stay and do business.
In the meantime, the saga continues with Chang being sentenced soon and
Torricelli's problems to continue in the Senate Ethics Committee.
Nobel Laureate's View on Korean Economy
By Prof. Chang Se-moon
University of South Alabama
MOBILE, Alabama _ The American Economic Association and its affiliated associations, which include the Korea-America Economic Association (KAEA), held their annual convention from January 4 to 6 in Atlanta.
As usual, a number of prominent economists came from Korea to participate in KAEA's well-prepared sessions.
The academic sessions were both humorous and serious. One speaker from Korea, whose name I conveniently forgot, drew a laughter when he said that president Rhee Syng-man was crazy about power; president Park Jung-hee was crazy about power until his wife was killed but was crazy about women after that; president Chun Doo-hwan was crazy about power; president Roh Tae-woo was crazy about money; and president Kim Young-sam was just crazy.
One of the best and most popular sessions was a panel discussion on Korea and the world economy, organized by KAEA. Panelists included last year's Nobel Prize winner, Joseph Stiglitz of Stanford University.
Let me summarize the panel discussion following Stiglitz's presentation on economic reform and restructuring in Korea after the 1997 crisis.
First of all, restructuring has to be done in a healthy macro-environment. When restructuring is progressing during a time of slow economic growth, the scope of needed restructuring becomes unclear.
One example relates to non-performing loans (NPLs) that are eliminated through the restructuring process. Some NPLs are obviously structural and need to be taken care of. Other NPLs, however, are cyclical rather than structural and increase during a recession. Reforms need to be directed at structural NPLs, not cyclical NPLs. Other panelists shared the view that a slow economy is not a good time for restructuring.
Secondly, one problem in restructuring Korea's financial sector is the unclear ownership of failing banks. The unclear ownership makes it difficult to borrow needed funds. In general, financial restructuring has to be done by owners although the role of the government is important and has been largely effective in Korea. Thirdly, the supply of credit flow is important during restructuring.
In Korea, both exporters and importers had difficulty in obtaining credit, making the restructuring process painful. Korea did well in comparison to Indonesia in which 16 banks failed, but not as well as Mexico, which had an access to U.S. firms for credit.
The final point that Stiglitz stressed relates to the legal environment in Korea. Strong financing depends on a strong sense of laws. The success in restructuring requires an access to international financial markets, which in turn requires a sound legal environment.
Stiglitz did not specify areas of improvement in Korea's legal environment, but repeated the importance of a sound legal environment for Korea to have an increased access to the international financial market.
Other panelists also made many thoughtful comments. Ramon Mareno of the Federal Reserve Bank of San Francisco reminded the audience of the pressure that Korean economy was feeling because of low-cost China and high-tech Japan.
Mareno also stated that the big push that the Korean government made in restructuring had been largely successful but reform is a continuing process.
Hilton Root of the Milken Institute stressed that old Korean ways of financing based on family and political ties were effective because of the trust that this approach provided to each other and that reform toward Western style capital markets would take time and frustration. Root also stressed the importance of diffused ownership of corporations to reduce corruption.
Robert Medsen of Stanford University discussed Japan's economic problems in depth. According to Medsen, Japan tried to bolster aggregate demand in the 1990s by artificial means such as unsustainable deficit spending; the objective of Japan's policy is not to grow but to protect existing industrial structure including huge excess capacity in banking; non-performing loans are rising in construction, services, wholesale and retail; and most importantly, restructuring is impossible in Japan because of the political environment.
Medsen gave an example of a loss-generating plant near Tokyo that Nissan could not close because of the opposition by Japan's leading politicians. Medsen also gave an example of numerous retail stores that cannot be closed because of political pressure even if sales are declining at these stores.
Medsen quipped that ``the difference between Japan and Argentina is five years,'' suggesting that the Japanese economy may be muddling through toward another crisis.
Stiglitz also touched on the subject of Japan by stating that Japan's problem is the over-valued yen. Stiglitz suggested that Japan needed to depreciate the yen to induce an inflationary policy, but did not answer when the question at whose expense should the yen be depreciated, arose.
In other words, the yen's depreciation will lead to more exports from Japan and less imports to Japan. This means that other countries such as Korea will not be able to export to Japan as much as it is exporting now.
The question unanswered was a list of countries that would suffer if Japan depreciates the yen. Obviously, Korea is one of the countries that will pay for the yen's depreciation.
Professor Kim Pyung-joo of Sogang University, who also is the current president of the Korean Economic Association in Korea and has worked hard on banking reforms in Korea, was quite generous in grading Korea's post-1997 structural reforms by giving A- for banking reform, C+ or B- for reform of non-bank financial institutions, and B- for corporate reform.
Interestingly, Kim stated that a report warning about the impending financial crisis was prepared by his committee on monetary reform in March of 1997 but its scheduled presentation to the then president Kim Young-sam on April 8 was prevented by President Kim's aides. This is not the first time that I heard of reports prepared to give an advance warning to the Korean government for the 1997 financial crisis.
My assessment is that there were good economists in Korea who had an uneasy feeling for the coming crisis early in 1997, but it is highly unlikely that anyone would have guessed correctly the speed and the magnitude of the crisis that hit Korea later that year.
It is important to thoroughly review how and why the crisis hit Korea as hard
as it did, and ensure the installation of all institutional fire walls that
would protect the Korean economy from similar disasters in the future.
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