Japan Downgraded: Korea Needs to Avoid Deflation

You Know It's a Problem When...Japan Downgraded by Moody's
Today, Japan was downgraded from AA to AA- by Moody's, one of the two most important ratings agencies.  These agencies are widely used by global investors when they consider whether or not a country's government will be able to repay its debts.  We can debate, and there are those that would sharply criticize whether or not these ratings agencies are useful, given the fact that they have largely missed the financial crisis on a systematic basis.  Nevertheless, it is still true that investors pay attention when large changes to ratings occur, especially to economies that are the size of Japan.  While there is no imminent risk to Japan, this gesture does reflect many of the things that the Seoul Gyopo Guide has pointed out on numerous occasions.  In fact, this post, which challenges why Koreans continue to learn the Japanese language, is one of the most-read posts on the Seoul Gyopo Guide.

The Japanese Quagmire:  Deflation
Recently, this article was written about Japan (Bloomberg.com).

Their (Japanese companies) advantage may be Japan’s disadvantage. Prices in Japan as measured by the gross domestic product deflator have declined almost without interruption since 1994. That has muted the effect of falling wages and provides a cautionary tale for Federal Reserve Chairman Ben S. Bernanke, who has been lecturing on deflation’s perils as a central banker since 2002.

“It’s (deflation) extremely corrosive,” said Richard Jerram, Singapore-based head of Asian economics at Macquarie Securities Ltd. “The problem is, it’s not a spectacular problem in any given month or quarter.”

Deflation will steadily sap nominal growth, depriving the government of revenue, until one day Japan will no longer be able to finance its borrowing, Jerram said. The country will either default on a debt of about twice the size of the economy or debase its currency to reduce the real value of liabilities.

What does any of that mean?  It means that deflation, over long periods of time, can result in the inability of those with lots of debt (like Japan) to either default, or to depreciate their currency (the Yen).  Today's downgrade of Japan by Moody's reflects this problem.  The downgrade's affect alone could very bad for Korea for a variety of reasons.  First, there are many, many Japanese tourists visiting Korea (go to Myung-dong sometime, all you hear is Japanese and Chinese, it seems).  If the JPY depreciates sharply, then the Japanese will not be able to afford to visit Korea.  Second, a depreciation in the JPY will make Korean-made products more expensive on the international marketplace.  Followers of the Seoul Gyopo Guide know that Korean corporations have feasted due to Korea's relatively cheap Won, when compared to the Japanese Yen.

The Korean Problem is Different But an Easy Answer is Difficult to Find
Korea, as everyday Koreans know, faces inflation which is higher than the officially reported rate (people living in Korea are now all vigorously nodding their heads in agreement).  You know that inflation is a problem when the English-written news sites report it.  Well, that has now occurred. The problem actually is not inflation per se, but the real problem is that wages and nominal wealth (checkbook balances, stock market holdings, real estate values, etc) are not increasing at the same rate.  This has been due to a large number of different problems.  The result is that the average Korean feels poorer even though the employers (companies) continue to perform well.
The Seoul Gyopo Guide has suggested that greater amounts of equity must be owned by employees.  Korean employees have been very reluctant in the past to receive compensation in the form of stock.  The problem with this is that cash does not have the possibility of appreciating at the same rate as inflation.

Korea Needs to Avoid The Japanese Example
Some of the Japan's problems may have been unavoidable, but Korea needs to observe, and prevent some of the causes for the current situation in Japan.  First, it is clear why US Federal Reserve Chairman Bernanke has been trying to avoid deflation:  Japan has unable to escape deflation's clutches for two decades.  Second, there is the longer-term issue of an aging population, who do not spend on the newest products and who do not treasure the newest innovations.  This is a little-mentioned, but critical factor in understanding why Korea has prospered.  Young Korean consumers demand the newest features, and thus, Korea serves as a "testing ground" of sorts for the global marketplace.  While it is a blatant stereotype to suggest that Korean consumers are choosier than almost any other consumer group in the world, it may, in fact, be true.  (If a product fails in Korea, then it is likely to fail abroad.  In addition to the joint ventures that Korean companies have had with US-based entertainment companies such as Dreamworks SKG, many first-run films actually open in Korea for this reason.)  Third, Korea must avoid huge national indebtedness.  This point should be obvious, given that the IMF crisis was largely the result of the huge debt overhang in Korea.
Many aspects of life in Korea reflect Korea's reluctant jealousy of Japan.  Korea's corporate structures and methods could (although not exclusively) resemble Japan's.  Both countries are highly dependent on foreign energy resources.  Korea may not, over time, be able to avoid some of the larger forces at work in Japan, such as an aging population.  However, many of Japan's difficulties can be avoided so that Korea does not suffer from Japanese-style deflation.

Korea's Tenuous FX/Interest Rate/Inflation Situation (Update 1)

Korea Declares A "War" on Inflation:  Too Late, It's Here
This past week, President Lee Myung-bak declared a "war on inflation."  Official statistics reflect what every day Koreans have already know:  inflation is a problem at home.  The Seoul Gyopo Guide has pointed out here, months ago, that the KOR-US Free Trade Agreement needed passing immediately in order to reduce the cost of any imports that come from any country.  Later this year, a Korea-EU Free Trade Agreement should also be in place.  These agreements are important, but they are not the dominant factors affecting everyday Korean life. This post describes some of the issues that face the Korean economy, and potential effects on the Korean population.

Korean Inflation Has Been Rising and Looks Like It Will Continue
After the fact, it has been reported that Korea's inflation rate has risen to 2 1/2-year highs.  To working-class Koreans, this is not news.  As a country that is highly dependent upon foreign sources of energy, the rise in the price of oil to nearly USD 90/barrel is an unwelcome development.  In addition, the price of commodities such as metals and food have also risen dramatically.  Given that Korea is a net importer of each of these, inflationary pressure is set to rise for the foreseeable future, as companies will attempt to increase prices of final goods.

Korean Interest Rates Are Going Up
This past week, the Bank of Korea increased interest rates, to the surprise of many.  The reason that interest rates are used to curb inflation is because higher interest rates will create additional demand for the Korean Won relative to other currencies.  In addition, people may choose to save instead of spend which will gradually reduce demand.

Rises in Interest Rates Could Hurt Korean Competitiveness
The other side of this balance is that stronger demand for the Korean Won relative to other currencies will make Korean-made exports less profitable for Korean corporations, or reduce demand for Korean-made products.  Since the beginning of the financial crisis beginning in 2007, Korea has benefited a great deal from the relative cheapness of the Korean Won.  This point has been made by the Seoul Gyopo Guide a number of times.  In fact, one reason that Japan's economy continues to lag is because competitive Korean-made products are cheaper than their Japanese competitors' products.   Conversely, if the Korean Won strengthens compared to other foreign currencies, particularly versus the USD, EUR and JPY, Korean products may suffer on the international marketplace.  This would be a major source of concern for all Koreans.
(Update 1)In the English version of Dong-A Ilbo, this article was written to reflect the same opinions already posted here on the Seoul Gyopo Guide.  The downgrade of Japan's debt rating by Moody's may have contributed to a slight depreciation in the Japanese Yen against the U.S. dollar last week.  Whether or not this is coupled with Korean Won strength or weakness is yet to be seen.

Rises in Interest Rates Will Hurt Domestic Real Estate
In addition to the challenge that a rising Korean Won would create on the international marketplace, the domestic Korean real estate market will continue to struggle.  The single biggest factor in the value of real estate is the level of interest rates.  Higher interest rates make it more expensive to borrow to buy an apartment, even in Gangnam-gu.  If the Bank of Korea continues to raise interest rates, then the value of domestic real estate cannot rise dramatically.  There are other factors influencing the price of Korean real estate.  For example, the aging population will reduce demand, over time, for apartments in the busiest parts of Seoul.  That will translate to lower prices over time.
In addition, greater transparency and greater belief in the laws governing Korean corporations will reduce the percentage of household wealth used for real estate.  Why is that?  It is because there are other assets, such as stocks and bonds, which may be more promising.  Those investments have been hampered by the fact that Koreans themselves are very wary of the largest chaebol, the government, and the legal structure that keeps corporate misuse of funds in check.  As the Korean economy and regulations mature, native Koreans may re-allocate their wealth from real estate to other areas.
The problem with lower real estate prices is that people will feel less secure, and may be unwilling to spend.  This has happened in the United States, where the plunge in real estate prices has depressed consumer spending.  It is not a heroic prediction to suggest that if Korean real estate prices decline, then Koreans that own their apartments are going to spend less money for food, movies, entertainment, and mobile phones.  (Well, maybe not for mobile phones, but you get the idea.)
The other problem with lower real estate prices is that there are lower amounts of real estate taxes that will be collected by the government.  Why is this bad?  It is bad because then the government would have less money to spend, if further economic stimulus is needed.  Korea has spent a great deal of money during the financial crisis by bringing forward infrastructure projects, as well as compensating construction companies who built large apartment complexes outside of central Seoul, and that remain unoccupied, even today.

A Few Potential Solutions
The Seoul Gyopo Guide has pointed out that the government and companies and society face difficult choices.  That is what is called a conundrum.   There are no easy solutions.  However, here are a few, some of which have been proposed in earlier posts.   
First, Korean companies need to hedge their exposure to the possible appreciation of the Korean Won.  This point has been made by the Seoul Gyopo Guide months ago.  If the Korean Won rises, and Korean products are less competitive, then the only way that Korean companies' profitability will be sustained is if there are measures to counteract a stronger Korean Won.  That is fundamentally different from recommending that Korean corporations should speculate on the KRW/JPY rate.  If there is a decline in global demand, or an appreciation of the KRW relative to other currencies, then Korean corporate performance will suffer, almost regardless of the quality of Korean-made products.  In short, the relative strength of the KRW is to Korean corporations can be compared to jet fuel prices to airlines.  The best-run airlines partially hedge their exposure, and so should Korean corporations.  Korean corporations need to do this without taking excessive risks; the knock-in, knock-out (KIKO) options debacle was a situation where Korean corporations misused derivatives (with the help of securities dealers) can be avoided by using simpler, more straight-forward strategies.
Second, Korean companies' investments in technology to create the most sophisticated, leading-edge products must be accelerated.  Korean companies have made huge market gains, even since the beginning of the financial crisis.  The hard-won profits and market share must be deployed to make sure that Korean-made products are the best from both a quality and features standpoint.  The Seoul Gyopo Guide has pointed out that China has overtaken Korea in shipbuilding during 2010.  Korea must reclaim its lead by offering superior products, and Hyundai Heavy, Samsung Heavy, et al seem to have responded. Samsung Electronics, Hyundai-Kia Motors, and other leaders must do the same.   
Third, the Korean economy must support small and medium-sized enterprises.  There needs to be a better way for the highly-educated Korean population to create wealth other than via speculation or working for a large chaebol.  This includes, but is not limited to, tax incentives for new businesses.  Small businesses employ the largest number of Americans, and while that is an unrealistic goal for Korea, there is little doubt about the fact that Korea has a well-educated, creative population which can create new ideas/products, and thus, companies. 
Admittedly, this is only a partial list of suggestions.  There will need to be changes in every aspect of Korean life, and perhaps even the way of thinking, in order for these suggestions to be taken seriously.  However, the benefit would be that Korea would become more independent in determining its own economic course.  That has limits, certainly, because of Korea's lack of natural resources, small population, and small geographic size.  Nevertheless, moving forward in this way will reduce the burden on the government which has to tread carefully.  Currently, if there were policy errors of any sort, then the consequences would be devastating.  The time to address these issues is now, while Korea's economy is in relatively good shape compared to its global counterparts, not when there is an emergency situation.

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영어선생 Hall of Shame Entry #8: Banning English Kindergartens Is A New, Dumb Law

The Korean Government Gains an Entry Into the 영어선생 Hall of Shame
The Korean Government has handled educational policy very poorly for a very long time.  That said, it is a very complex problem. On one hand, the fact is that learning English is important.  This fact is unlikely to change anytime soon.  The Seoul Gyopo Guide has stated it on a number of occasions.   On the other hand, Korea is trying to promote a society which promotes social mobility in which the economically challenged still have the opportunity to pursue their dreams.  It has done so clumsily, and yet another example has exhibited itself.

Korea to Ban "English Kindergartens."  
Today, this story appeared in the Korea Herald.  These are selected excerpts from the article.

“According to the law, English is excluded from regular kindergarten curriculum. Some hagwon operators have been providing English programs in the form of regular nursery education, misleading the parents and their children,” a ministry official said.

The bill aims to crack down on hagwon that pretend that they are also licensed kindergartens.

“Since (some kindergartens) are registered as private institutes rather than regular kindergartens, they are not subjected to government regulations on fees,” he said.

The qualification of the facilities was also brought into question. Recently, a mass food poisoning took place in an “English pre-school” in affluent southern Seoul. Investigators said the operators had served outdated foods and admitted that tight hygiene regulations were not applied to hagwon. 

This is a Public Policy Issue, Not A Legal Issue
This law is to try to ban English kindergartens in order to prevent the children of the wealthy from getting a head start.  Anything else is a ruse.  Read the reasons in the article, where the government officials point out that there are problems with hagwons that are representing themselves as kindergartens.  The article continues to mention that there may be health issues at some of these "English Kindergartens."
If any of that were true, the correct remedy would be better enforcement of the existing law, not a new law that bans "English Kindergartens."  If hygiene were the problem, and parents were upset, then the parents have the right to address the matter with the hagwon directly.  There is a Korean term for this which is "치마바람" which is literally the "skirt's wind," but in reality means that mothers will try to get an edge for the well-being of their children.  In other words, the consumers (mothers) could, and would, effectively punish that individual hagwon if there were really a problem. If there were such a thing as consumers' rights in Korea, then this would be effective, and that particular English Kindergarten would be effectively put out of business. 

Either the government is acknowledging that its existing laws are poor and inadequately enforced, or there is something else at the heart of the matter.  The Seoul Gyopo Guide believes that it is the latter:  the Korean Government is trying to change its public policy under the guise of accusing hagwons of doing things that were originally illegal.


Conclusions
This article is far too short.   The Korean Government is having difficulty in trying to level the playing field among the economically privileged and economically challenged.  Its measures to date have been a total failure due to poor planning and poorer execution.  It is another example of two central themes of the Seoul Gyopo Guide.
From previous posts, the Seoul Gyopo Guide has pointed out the following:
It is the notion that the law is subject to change on the whim of parliament due to market pressure or political opinion that is the problem.  Secondly, Korea has deserved its place among a very few privileged nations, but its social and legal structure must match its fully-developed economy.

There are other problems that this law creates, such as the fact that investors, once again, cannot invest in business in Korea with any confidence, because the law changes at the whim of the government that is in power at that point in time.  This is very similar to the bond investors' case, and the KEB debacle.  The law changed on investors after the investment had already been established.  In this respect, Korea compares very unfavorably to Japan (that is a quite an admission from The Lost Seoul indeed).  In any case, the Korean Government, somewhat unsurprisingly, has earned its place in the 영어선생 Hall of Shame.

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영어 선생 Hall of Shame Entry #7: 110 Korean Children Expelled From The Philippines

110 Korean Children Expelled From The Philippines While Learning English

Today, this news story came out of the Philippines.   The Korean students have been expelled out of the country, and the organizers have been jailed inside the Philippines.  As I would like to say, you can't make this stuff up.  There is a list of people that deserve a place in the 영어 선생 Hall of Shame.

What were the parents thinking?
The idea of going abroad for a short period of time to learn English is not new.  There are all sorts of camps, etc set up in English-speaking countries for just this reason.  There is the concept of "homestudy" where a student stays with a family in another country, and enters the local public or private school.  Many mothers bring their children to temporarily live outside Korea to enroll their children in a school of an English-speaking country.  How many of those students do this without the proper visa authorization is unknown.  However, the risk taken is not small.  Are the children, aged 10-16, supposed to know these rules?  Absolutely not: it was the parents' responsibility.

Coordinators Have Definitely Done Their Share
Let's call these people the Coordinators.  Their role here is to organize and liase with both the parents and the educators (teachers/school or facilities) in order to provide the English learning school.  These people really have no excuse whatsoever.  There are two possibilities.  Either they were inexperienced and did not understand or plan for the risks associated with not have the proper visas for the students.  Or, they were experienced and chose to overlook these rules.  Whichever one it is, the Coordinators also have a great deal of responsibility and deserve a place in the 영어 선생 Hall of Shame.

The Educators Are Also to Blame
The Seoul Gyopo Guide suggests that the blame largely rests on the parents of the students.  Nevertheless, the educators could have also established the institution as a vacation, or a camp, assuming that the students were not there on a permanent basis (i.e. longer than the 90 day visitation allowance).  The facts in the newspaper are not clear on this matter, so it is difficult to tell.  However, there are plenty of other students in foreign countries that have not been deported.  Whether or not this is simply due to insufficient enforcement of the law is unknown.  In any case, the educators should have known that there was a risk, and before accepting the students, that proof of a visa should have been verified.  At universities in the U.S., for example, this is an absolute requirement.

Conclusion
Who is to blame in this case is unclear.  It is irrelevant.  Parents, Coordinators and the educators richly deserve a place in the 영어 선생 Hall of Shame.  One thing is absolutely clear, however.  The students, 10-16 years old, are undoubtedly the victims.

Annoying Things About Korea #6: The English Version of Korean Newspapers Are Not Delivering News

The English Versions of Korean Newspapers Deliver News That Isn't (News)

Today, two separate articles appeared in different Korean (English version) newspapers.  They are not newsworthy, for separate reasons.  Perhaps that is the fascinating aspect, which is that there are multiple reasons that separate stories don't deserved to be published.

First, the following editorial appeared in The Chosun Ilbo, which had the groundbreaking (sarcasm) opinion that "2011 Will Be a Decisive Year for the Korean Economy."  None of the facts reported in the article are news.  In fact, most of those factors can be found written here (under the category "Korean economy", which was posted here on the Seoul Gyopo Guide over the past three months. 

Second, the following article/advertisement appeared in The Korea Herald.  Let's be clear about this: the nationwide sale occurring in Korea will benefit Koreans, not foreigners.  The sale itself will be a mere coincidence.  One reason that foreigners will travel to Korea and buy something is the relative cheapness of the Korean Won compared to other Asian currencies.  Period.  There is no doubt that Insa-dong is a beautiful place (I liked it better when it wasn't modernized, but it is still my favorite place in Seoul), but the sale and accompanying events are not the reason that foreigners will specifically travel there.  In short, this article in The Korea Herald is a mere advertisement.  A more newsworthy story might have been "Strong Asian Currencies Makes Korea a Popular Tourist Destination."  Now, some may say that this post is suggesting that it is only the cheap Korean Won that attracts foreign tourists.  Obviously, that is not the claim here.  You don't see millions of tourists flocking to Zimbabwe, right?  Korea has a great deal to offer, especially in art and history (my opinion), with convenient transportation options for tourists.  However, to say that the nationwide sale is going to attract foreigners to Korea?  Nope. Native Koreans are more likely to enjoy the benefits of the sale, especially those that do not frequently travel outside Korea. 

Please note: this article is not talking about the control of media content by the government, etc, because that occurs in most every country, not only in S. Korea.

Comments are welcome: The Lost Seoul posted every comment that did not contain slander or profanity.  A difference of opinion or perspective is welcome here at the Seoul Gyopo Guide.

Annoying Things About Korea #5: Wi-Fi Hotspots in Korea....Ole, Ole, Ole, OLLEH (updated)

Connecting to Wi-Fi Hotspots is Difficult and It's (Largely) Olleh's Fault

This could also belong on the What Foreigners Need to Understand About Korea (and Koreans) page.  Korea is the well-known to be the most widely internet-connected country in the world.  Tell that to a visitor from another country.  There are plenty of places that Wi-Fi is available, BUT the fact is that many, many, many places are controlled by Korea Telecom's Olleh.  You need to be a member of Olleh in order to connect to Wi-Fi at these hotspots.  The problem with becoming a member?  You need a national identification number that can be validated by software.  And there begins the problem.

Even if you have a visa, and you have a national identification number, the identification number isn't recognized by the software.  This is a problem on many Korean websites, PC rooms, etc when you want to connect to the internet.  For example, you can join a PC room with a user ID and password and get a 10% discount, but it requires your national identification number (an ID also calculates the exact usage time, rather than rounding up to the nearest hour if you have no ID).  There is an algorithm embedded in the number itself, and software installed around Korea also recognizes the pattern.  However, foreigners that have visas have a national identification number which has a different algorithm, and as a result, if you try to enter your number at a PC room, then it usually doesn't work.

This is changing to some extent in Korea.  GMarket, the very popular website, has a special place for foreign buyers, who can establish an ID correctly.  It is a small pain, but it is do-able.

Best idea?  Meet a Korean-native friend, and use his/her Olleh ID.  Don't do anything illegal, and it will be fine, if you are just trying to surf the web.  Other ideas?  Avoid going to the coffee shops that use Alleh entirely.  I have found that Caffe Pascucci usually has publicly available Wi-Fi.  In any case, the difficulty in signing onto Wi-Fi hotspots in Korea is highly annoying to foreigners, resident or visiting.

Update:  I met with a friend in Seoul, and acknowledged the same thing to me.  Connecting to wi-fi is also difficult to him, because he doesn't belong to KT. One notable exception exists:  Incheon International Airport, thankfully, has free wi-fi, while many U.S. airports have wi-fi but you need to pay by the day or subscribe to network, called Boingo, that exists at many airports.

Yoon Hye-Rin Wins Actress of the Year Again. Wait...Who???

In today's English edition of the Chosun Ilbo, it was reported that Yoon Hye-Rin won actress of the year for the second year running.  Who the heck is Yoon Hye-Rin?  Seen in the "President" in the past year (which I thought was lame), she also played Mishil in the very-popular The Great Queen Seondeok (여왕선떡) a couple of years ago.

You need to be middle-aged, or a Korean drama fanatic (I used to be and downloaded this drama on the internet), in order to know that Ko Hyun-jung was Yoon Hye-Rin in the K-drama classic The Sandglass (모래시계).  A trailblazer, The Sandglass recorded the highest ratings ratings ever, higher than East of Eden, IRIS, Jumong and gasp, even higher than Boys Over Flowers (blech, don't get me started) 

Of course, Ko Hyun-jung is can now be seen almost everywhere in Korean advertisements, after coming out of retirement.  She has won the hearts and souls of Koreans not only for her beauty (formerly a Miss Korea winner), but also for her personal story as the ex-wife of a chaebol executive.  

So while Korea is full of 20-something models and actresses, it is interesting to note the continued fame and success of Ms. Ko over such a long time.  Many decades from now, she may be known as one of the original Hallyu (what is Hallyu?) stars. 

Pardon the interruption:  the Seoul Gyopo Guide will now return to its normally-scheduled program....

Annoying Things About Korea #3: No Eating Potato Chips on the Street

Drinking Soju, Vomiting and Fist-Fighting on the Street are Fine, but...

If the Seoul Gyopo Guide listed Annoying Things About Korea in proper order, this might be #1.  If you are in Seoul (and other cities) in Korea, then you will easily find people drinking soju while sitting on steps of stores, or company employees vomiting after eating and drinking.  On many street corners, you can find people eating fried food which has been prepared in oil that has been sitting for hours (if not longer).

However, you will not find Koreans eating food and simultaneously walking on the street.  In fact, if you would like to definitely reveal yourself as a foreigner, eat a candy bar while walking to the subway stop.  If you are not of Korean descent, then people already know that you are not from Korea.  If you are of Korean descent and you eat a bag of potato chips while walking, then everyone on the street will identify you as a Gyopo, and in some cases, look at you as if you are from Mars.

Given that Seoul is a city of 15 million people, and that people, especially students (hilarious clip), are racing to and fro to survive, isn't this habit just a wee-bit old-fashioned?

Annoying Things About Korea #2: Those Blinking Ads on the Internet

Blinking Lights on Christmas Trees is Fine.  On the Internet?  No.

When you see Seoul at night, you see nothing but lights, lights, and more lights.  Stunning really.

However, why Korean shopping websites believe that the blinking will encourage shoppers is another matter altogether.  I completed a search on a very well-known Korean shopping site and this is what you get.
I could not hit the "back" button on my browser fast enough.  A piece of advice: don't allow pop-ups when you visit a Korean website.  It gets worse.  Much worse.

The Year in Review: Is Lee Myung-Bak the President of the Year?

South Korea Has Accumulated Impressive Gains During 2010
As native Koreans would be glad to share with foreigners, Korea is far from perfect.  Nevertheless, the branches of government have navigated exceptionally difficult conditions very well during 2010.

Here is a partial list:
a.  Korea's economic growth was the greatest amongst OECD members during the 2nd Quarter 2010.
b.  Korea's official unemployment rate has steady at a low 3.7%.
c.  Foreign exchange reserves, the world's sixth largest, are near an all-time high at $290.23 Billion.

Circumstances Have Favored South Korea
Many of the positive things that have happened to the Korean economy are the result of circumstances alone.  Here is a partial list of those circumstances which has benefited Korea.
a.  Governments around the world have stimulated their economies which has resulted in continued economic demand for Korean-made products.
b.  The strength of the Japanese Yen has made Korean-made products cheaper, which has greatly helped Korean corporations (chaebol). 
c.  China, the world's most populous nation, has continued its torrid economic growth.

It has been a nearly-ideal situation for Korea:  its largest trade partners are relentlessly attempting to avoid Japan-like deflation by continually stimulating their economies with monetary and fiscal measures.  Korea's largest potential market, China, continues to grow unabated as the Chinese government is trying to develop China into a modern economy.  Japan, the nation with the majority of direct competitors to Korean corporations, are saddled with sagging domestic demand and a currency which has made their products expensive relative to Korea's in international markets.

The South Korean Government Has Acted to Strengthen Its Hand
While it may be suggested that South Korean President Lee Myung-Bak has merely been in the right place at the right time, there is little doubt that the President Lee and other governmental agencies have taken steps to provide for Korea's citizens, as well as to improve Korea's stature on the world stage.
a.  Korea has only gradually reduced its fiscal stimulus programs because it has remained cautious regarding the sustainability of the global economic recovery.
b.  Korea and the U.S., finally, have agreed on a Free Trade Agreement, which should improve the quality of life in Korea, and reduce inflation for Koreans.
c.  The Bank of Korea has acted to keep the Korean Won relatively cheap in order to keep its export growth strong.  While this has longer-term risks, this has helped Korean corporations in the short run.
d.  Korea's emergence on the international stage was made obvious by its hosting of the G20 Seoul Summit in November. Even if you do no believe that much was accomplished, the fact that the meeting was hosted in Korea demonstrates its continuing importance on the world stage.

Korea Still Faces Fundamental Challenges
While Korea has enjoyed, as a nation, economic conditions which are superior to almost all other OECD nations, fundamental problems exist which cannot be solved overnight.  In addition, only dramatic policy changes would have any effect, and the side-effects may be undesirable to many.  Here are just a few lingering issues.  Each issue itself is worth a post, which you will be able to find here at www.seoulgyopoguide.com in the future. 
a.  The value of real estate continues to disappoint owners.  The value of real estate has actually declined in Seoul over the past two years, whereas in Hong Kong and Tokyo, prices have entirely recovered (Hong Kong) or are still recovering.  This is not occurring in Korea.  That is a problem because people's belief about their wealth is tied to the value of their homes.  Real estate represents a greater percentage of a Korean's net worth than most other countries in the OECD.  One reason the Bank of Korea is reluctant to increase interest rates?  Increased interest rates leads to lower real estate prices, something that could lead to less consumer spending in Korea.
b.  The increasing average age of the Korean population may weigh on social programs.  Many Koreans do not believe that the Korean National Pension Service will be able to help those who currently work, when they retire.  Assuming that Koreans want the Korean Pension Service to survive, the choices seem to be either higher taxes, or lower entitlements.  Fundamental changes to the structure of the Korean pension system may be more feasible in Korea when compared to the U.S., where the system has been in place for a much longer period of time.
c.  Underployment will continue to be a problem, as has been posted here.  The bottom line is that Korea is over-educated, given the number of skilled workers needed in a nation of only 50mm.   Comparisons among Korean workers are drawn using increasingly irrelevent criteria.  How to resolve this will be the topic of a decades-long debate.
d.  The private tutor (hagwon) system threatens the Korean family and the Korean economy.  It isn't the goal of this article to discuss whether or not Korean students should study so hard, or if Korean parents should attempt to send their children to multiple hagwons per day.  What is clear, however, is that the average Korean family spends too much of its disposable income on the private tutor system in Korea.  That means less consumer spending and increased stress on the Korean family.
For those that have studied economics, a dollar spent on the hagwon system does not have the same multiplier effect on the Korean economy that other consumer spending has.  For example, if a student spends $200 a month on a hagwon, that money is used to pay the rent and  the teacher of the hagwon.  However, that same $200, if spent on a consumer good, such as food, then the entire support system (e.g. a restaurant, its workers, the farmers of ingredients, etc) is far larger.  In short, the money used in hagwons has a definite "dead end" to where the money goes.  Money used elsewhere, The Lost Seoul contends, would have a greater, wider economic impact.
The hagwon system has been criticized for encouraging a greater separation among people of different economic classes.  The government has publicly raised this concern.  Recent attempts to try to standardize the questions for the college entrance exam in Korea have been widely (and justifiably) criticized due to the lack of thorough planning and poor execution of implementing the new system.  However, the fact that the government is attempting to do so is a step in the right direction.  Hopefully, these types of measures will be ultimately successful.
d.  Inflation.  Currently, inflation is much higher than is being reported in governmental figures.  Everyday Koreans will tell you this.  Being energy and resource poor, Korea will be face increasing inflationary pressure as a result of the demand for resources because China's demand will not fade.  Currently, the Lee administration has acted in some way to accelerate Free Trade Agreements.  However, as long as the Korean Won is held lower than is justified on international markets, import prices in Korea will remain very high, contributing to higher inflation. 

Conclusion:  Korea Needs the Next Generation of Leaders
Korea is resembling the United States more everyday: complaining about the government has become a national hobby.  At some level, the government has failed for one reason or another.  However, when compared to its counterparts in other nations, the Lee Administration has performed admirably.  The question now is how to solve the longer-term problems, without upsetting the delicate balance that currently exists.  In order for the younger generation of Koreans to take the reins, careers in government and public service must be more prestigious and frankly, better compensated.  It is no coincidence that another widely-commended Asian government, Singapore's, attracts some of the brightest from the best universities in Singapore.  Singaporean officials are among the most well-compensated officials in the world.  Korea must cultivate those in their 30s and 40s to prepare to become the policymakers for the future.  If Korea can do this, then it can solidify the hard-won gains since the end of the Korean War.
While President Lee's early years were difficult due to the global financial crisis, the fact is that Korea, and President Lee has deftly dealt with the situation.  It can be said that Korea's position in the world economic order has improved quite a great deal since the onset of the crisis.  As stated above, some of that is the result of favorable circumstances.  Nevertheless, it is a fact that when things go well, the leader is given a great deal of the credit.  In this case, President Lee and the Korean government deserve many of those accolades.

The American Envy of the Korean Education System (Part 4): Why Do Koreans Stop Studying?

Note:  This is Part 4 of a series.  Parts 1-3 can be found here.

Why Do Koreans Stop Studying When Entering University?

There are many, many possible explanations.  If you go to Seoul National University or nearby Yonsei University in Seoul, as well as the subway stations that surround the various universities in Korea, you will find the identical scene everywhere you go.  Lights, lights, and more lights which are illuminating shopping, restaurants, and PC rooms.  What do you not see?  Tired students carrying books.  If you go to the top universities in the U.S. (except Stanford which The Lost Seoul still contends is like fantasy-land), you cannot find those scenes.  That is quite remarkable:  even New York University, right in the middle of Manhattan, is strikingly quiet except on one street (8th Street).  In England, Oxford is deadly silent.  Why the striking difference?  In Korea, the students are PLAYING, not studying.  This part of The American Envy of the Korean Education System looks for a partial explanation.

Possibility 1.  Korean students are burned out.  It is true that the average student that has entered a college in Korea has studied much more than a student that has entered the same-caliber college in the U.S.  An American student has endured 3-4 years of high pressure, high-intensity preparation.  In Korea, that student has been doing this since the 6th grade, at the minimum.  That means 2-3 extra years of high-intensity studying.  

Possibility 2.  No Hagwons Means No Need to Study.  Korean students have been used to the hagwon system for more than 10 years each.  All of a sudden, there is no hagwon drill master wtching the performance of a Korean student.  There are no drills which supplement classroom lessons. 
It is a fact that many top hagwons are more difficult than the school a student attends.  It is no wonder that a Korean student may feel liberated when entering college, and uses that freedom to...do anything else except study.

Possibility 3.  There is no "next step" in Korea. For American students, the path to a top graduate school, like Harvard Law, or the University of Chicago MBA program, will require very good grades while in college.  If you want to become a medical doctor in the U.S., not only do you need good grades, but you need to be involved in extra-curricular activities like laboratory work or volunteer work.  Importantly, there are separate, high-competitive entrance exams such as the GMAT and LSAT to enter graduate programs in the U.S.
In Korea, you apply to a college which may automatically qualify a student to the graduate school.  For example, a student can apply to Catholic Medical School in Korea at the age of 19 before entering university.  That means that there is no additional pressure to perform in college for Korean students.  Now, this system is currently under review.  For example, entry into law school in Korea is being transitioned to a system similar to the U.S., which means that a person needs to graduate from college first, and then apply to law school separately.  Whether this system becomes universally accepted in Korea is yet to be determined.  In short, the lack of a "next step" with a new application process in Korea may lessen the need for Korean students to perform at the undergraduate level.

Possibility 4.  Males are "Preparing" for Military Service.  The Lost Seoul believes that the mandatory military service, while it may be necessary, services as a barrier to progress in other areas for certain males.  That is not to say that the military is not valuable.  Korean men form unbreakable bonds with one another by collectively going through the difficult times during their military service.  Certain men, who lacked personal responsibility traits, can mature and gain those traits during military service.  Nevertheless, other males, who already possess these qualities, could use their time more productively by pursuing their personal and professional goals, at the very time in life when both physical and mental capacities are at their height.  Knowing that military service awaits, one reason that Korean men don't study during college is because they all know that their freedom will soon be suspended for 2 1/2 years.

Possibility 5.  The "Mrs." Degree.  There is no doubt that this is fading away in Korea, and quickly.  Given the fact that there is no mandatory military service, the fact is that the women of Korea can use this time to develop themselves personally and professionally.  However, certain schools such as Ewha Women's University (이대) still have that lingering reputation as being a wife-preparation college.  In the past, perhaps this was true, but now, The Lost Seoul doubts that this is a serious reason for the lack of studying by college-age students in Korea.

Final Answer?  The Lost Seoul's best guess is that it is Possibility #1 and Possibility #2 explain most of the reason.  Korean students have already studied for 3 extra years when compared to American students in order to enter into a highly competitive university.  No hagwons are available to apply additional pressure upon students.  Some of this is changing now, as hagwons also exist at universities.  Nevertheless, these hagwons are not nearly as prevalent at college as they are during a Korean students' high school years.  These two possibilities also explain Korean students' relative failure at Ivy League schools, after graduating from Korean high schools.  Perhaps some of this is due to English, but there are other foreign students from other countries that do not have the same failure rate at American universities. 

Conclusions.  Korea caters to the mean, while the U.S. caters to the extremes.  While the average student in Korea may test better, the top students in the U.S. have almost unlimited resources at their disposal.  This is largely explained by the need for Korea to elevate an entire nation since it has many limitations:  lack of geographical size, lack of energy/natural resources, history of subjugation.  The U.S. knows none of these limitations.  The U.S. has the resources to attempt the extreme, and champions individual rights.  In general, Korea does not know these concepts.  This may change as Korea has risen from one of the world's poorest nations to one of the richest.  We cannot know this.  We also cannot suggest changing Korea to mimic the U.S. would be a positive for Korea as a whole.  It would be convenient to pick and choose the best aspects of each system, but each system, its strengths and its weaknesses, reflect the nation's history and political influences.  In short, there are small aspects in which the Korean system can and should be emulated, but the entire system cannot be duplicated.
However, there is no doubt that students in the U.S. would perform better if not ingrained with attitudes such as "I am no good at math" as if that was a blessing or gift:  Korean students know and have proven that just practicing more diligently will largely compensate for any slight differences in natural ability.  American students give up well before they will ever know if they could have attained any goals. 
On the other hand, Korean students need to learn the American saying "It is not how you begin, but how you finish."  Those Korean natives who know this are currently trailblazers in their fields.  Hopefully, Korean students will learn from their example in the future.

Amazing! Logic Reigns, The S. Korea - US (KORUS) FTA Finally Resolved

Korea-US Free Trade Agreement, At Last
A few hours after the Seoul Gyopo Guide's third post regarding the necessity of the S. Korea - US (KORUS) Free Trade Agreement, an agreement was reached, as the impasse regarding auto tariffs was resolved.  The Seoul Gyopo Guide has argued, on multiple occasions, that the FTA would benefit Korean citizens who are suffering due to inflationary pressures in Korea.  Any extra measure to reduce this pressure would be welcome.

Korean Government Acted Wisely by Conceding Insignificant Points
Korea's concessions were proper in the larger context, given that the country is suffering from a higher cost of living than is necessary, due to tariffs on all types of imports.  In addition, it was refreshing that Korea's delegation properly pointed out that there are many levels and stages of international cooperation.  Korea rightly gave concessions in on the very smallest points in the interest of its people as a whole.  If you want to iterate with cooperation, then give-and-take is necessary.  

Time to Remove the Fakers
Now, it is time for the politicians in Korea and the U.S. to pass the FTA in their respective legislatures.  The Seoul Gyopo Guide will identify all those in either country who oppose the passing of the KORUS FTA.  It is quite simple, really.  For those that oppose, the citizens can return that legislator to the private sector.  In other words, both Americans and Koreans can, and should, vote any legislator that opposes the KORUS FTA out of office.  The voting records of legislators in both countries are a matter of public record.  Citizens of both countries should make it very clear to those legislators that their futures in public office depend on their vote of the KORUS FTA.  You will be able to find those that cater to special interests instead of the well-being of their constituents as a whole.  This is especially true for Korean legislators: members of the General Assembly should vote unanimously.  Korean citizens should watch the General Assembly carefully.  Protesters and activists who suggest that the KORUS FTA should not be ratified will be revealing themselves as narrow-minded parties that are looking for publicity only, and not to serve the Korean citizens.

Ignore the Korean Press Coverage Regarding Protests
In the coming months, there will be the inevitable protests, and potentially, there will be news on the internet reporting that Korea (or Koreans) do not approve of the KORUS FTA.  That is fiction created by those who want greater viewership or sponsorship.  Everyday Koreans understand that they will want to purchase American-made products as soon as they are available in Korea.  Many, many of the American brand names that are popular in Korea will be affordable to everyday Koreans, as opposed to only the privileged. In the coming days, the Seoul Gyopo Guide will explain that there will be some resistance for the KORUS FTA, but that will be from the largest deluxe department stores, like Shinsaegae and Hyundai Department Store, because the "designer" boutiques of American brands will be revealed to be massively over-priced. The pictures and footage of Korean protesters is entertaining, maybe, but will not reflect the sentiment of the Korean population. Do not be led to believe otherwise.

The Sooner, The Better
For the suffering Americans in the midst of an anemic economic recovery, and to everyday Koreans where inflation is high (and rising rapidly in many areas), the KORUS FTA cannot be passed soon enough.  The Lost Seoul hopes that both sides can proceed quickly and finally ratify the agreement.  Delays are unwarranted and those causing delays should be punished by voters at their next possible opportunity (i.e. election).

Why Korean Women Dominate Women's Golf

Numbers do not lie:  Korean women occupy 22 (23 if you count Michelle Wie, my favorite) out of the top 50 in the latest Rolex Rankings which is the globally accepted women's ranking system.  Perhaps you would think that the rest of the world would have changed its practice routines, techniques, etc to adapt to the 5-year dominance by a country with only 50MM people.  In addition to being proud of these achievements, The Lost Seoul believes that this dominance as a group will continue.  Understanding how this came to pass provides valuable hints for people that want to understand Korea (and Koreans) as a whole.

Instruction is Available Everywhere
Korea has multiple golf channels on cable TV, which provide practical instruction to golfers of all levels.  I have taught both tennis and golf to people as a personal favor.  The fact is that English-language golf shows, and magazines, give largely irrelevant golf instruction.  The 15 handicapper doesn't require an article about how to hit 4 types of chips/pitches with 3 wedges.  He needs to master 2 chips/pitches (one high trajectory, one low trajectory) and probably with 2 wedges at most.  After watching shows in Korea, the amount of relevant instruction available and usable by most golfers is impressive.  Perhaps this is because U.S. golf instruction is dominated by "stars": Leadbetter, Harmon, et al, and of course, the top golf pros.  And while there is zero doubt that many of this instruction is great and correct, the point of this post is that a common person with average coordination/talent, only has the time or budget to remember 2 or 3 key points.  In Korea, the instruction does a better job of focusing on these points than in the U.S.

Koreans Study and Practice Habits Translate Perfectly into Golf
It is the institutionalized Korean study and practice habit routine which separates Korea from the rest of the world.  Koreans have learned from a very young age to practice, practice, practice.  Children attend study centers until 8-10pm from a young age.  Most of this is practicing problems or drills of some sort.  Taekwondo is a sport where form is all-important.  If I can show slow motion video of a proper golf swing, a Korean has already learned how to replicate the motion almost perfectly.  If you go to a driving range in Korea (including in the middle of Seoul), you would be SHOCKED at how many golfers have the club set properly on the plane at the top of the backswing.  My personal opinion is that number is probably something like 60%.  It isn't an exaggeration.  Since golf is a game of building a reliable, repeatable swing, by the time a Korean woman becomes a pro, the swing is almost completely built from a technical viewpoint.
It is true that access to golf courses is limited for middle-class Koreans.  However, access to driving ranges and now golf simulators (called Screen Golf in Korea), is easy:  they are everywhere.  In certain neighborhoods in Seoul, you can easily find 5-10 Screen Golf centers within a 10-15 minute driving radius.  While they do not simulate the lie (and weather) correctly, these simulators are very accurate with respect to distance.  So, a Korean golfer can know, in the middle of winter, that his/her 5 iron travels 180 yards.

Teamwork is a Secondary Goal
Korean history is not a story of groups of people who collectively overcome obstacles and achieve greatness.  Instead, it is filled of individual heroes/heroines.  King Sejong, Lee Kun-Hee, the list goes on and on:  the focus is on individual achievement.  What sport (along with tennis) is more individualistic than golf?  Certainly, trailblazers have created the inspiration for the current generation of Korean women golfers.  Pak Se Ri and Grace Park have instilled the notion that a Korean golfer can conquer the world.  This has been the case in other sports in the past as well. Sweden's Bjorn Borg success mobilized a country of less than 7mm people to create the world's dominant nation in men's tennis during the 1980s.  Pak Se Ri and Grace Park have done the same for Korea, when golf was not a popular sport.  The two transformed Korea into a golf-crazed nation.

Korean-Americans Have Joined The Korean Golf Wave
Second-generation Koreans, born in Korea or the U.S., have also begun to make their imprint on the golf world.  This year, a Korean-American won the U.S. Women's Amateur.  Young Koreans have also advanced very far into the U.S. men's amateur.  Korean-Americans Michelle Wie and Anthony Kim are two of golf's brightest stars.  It may be the fact that being brought up by native Koreans, with the study/practice routines mentioned above, may have been instilled in this group.

Why Have Korean Men Not Made the Same Impact as a Group?
Certainly, there are outstanding Korean men professional golfers on the global stage:  KJ Choi and YE Yang are well-known to golf fans.  YE Yang was Asia's first major winner, and perhaps more famously, the first to defeat Tiger Woods in a major when Tiger Woods led after three rounds.  There are three reasons that Korean men do not, as a group, have the same stature as Korean men.  First, men's golf has far deeper competition than the women's tour.  On a given day, the 50th ranked men's golfer can win a major championship.  This is rarely the case on the women's tour, i.e. a "suprise" winner of a women's major is usually the stage used to announce a new star to the tour who will last near the top of the rankings for years.  Second, physical size and strength in men's golf is a factor.  Dustin Johnson and Bubba Watson can drive the ball 300 yards in the air.  "Stupid long" is how Tiger Woods has described Dustin Johnson.  Third, The Lost Seoul believes that the mandatory military service serves to stop the progress of male Korean golfers.  As males mature physically, and mentally, Korean men have to go to the military for 2 1/2 years at the age of 23-26 (approximately).  Well, that is precisely the time that men develop and mature in athletics (and in every other way).  The study/practice routine is interrupted, and when American/European young men are pursuing their dreams of joining their professional tours, Korean men are in the army.  That serves as a barrier that almost cannot be overcome, except in a very limited number of cases.  It is unlikely, then, that we will witness a Korean wave of men that dominate on the PGA or European Tour.

If You Understand How Korean Women Have Done This, Then You Can Understand Korea
None of the information above is a secret.  They are facts that can easily be confirmed by going to Korea, and stepping inside a driving range.  The attention to practice and repetition, along with an understanding of the importance of form, has been combined with availability of relevant instruction.  In addition, the recent advent of Screen Golf (which is run via PC) will also favor the development of Korean golf.  That is not to say that putting, touch, etc are not important.  Of course they are.  You could make the argument that if Michelle Wie was better from 100 yards and in (including putting) that she would be even higher in the world rankings.  That doesn't mean that Korean women will win multiple major championships.  In fact, Korean women have underperformed their rankings in majors.  You could claim that while the repetition has made Koreans consistent contenders, that winning championships is still something that must be learned, and that has not been mastered by Korean women.  However, as a group, Korean women will stay among the most well-represented on the Rolex Rankings. 

About the Seoul Gyopo Guide
This blog is dedicated to those Koreans that want to learn about how the world outside Korea works (which includes the English langugage).  It is also meant to help foreigners to understand Korea and Koreans.  Korea is a fascinating combination of old and new, and occupies a critical position within the global economy.   Visit the Seoul Gyopo Guide for posts on the Korean economy and society:  its quirks, its brilliance, and amazing vitality.

Annoying Things About Korea #1: The Price of Electronics is Stupidly High

Annoying Things About Korea #1:  The Price of Electronics is Stupidly High

Korea is the home of two of the most advanced consumer electronics products companies in the world, LG Electronics and Samsung Electronics.  A long time ago (30 years ago), these products made by LG and Samsung were relegated to discount stores in the U.S.  LG was called GoldStar at that time.  Both brands were regarded as lower priced, lower quality brands.  Well, that has changed indeed.  As a result of global competition, the prices that LG and Samsung charge in foreign markets are limited by the fact that there are other capable consumer electronics companies:  Apple, IBM, Sony, Dell, and now Chinese-made Haier is making progress on the international stage.  Perhaps you would believe that the competitive pricing that exists in other countries would also exist in Korea.  Nope.

The Seoul Gyopo Guide vehemently disagrees with the Korean companies that charge excessive prices for products without the most updated features to Korean citizens.  When considering laptop computers, it makes absolutely no sense to buy a Korean companies' laptop computer in Korea.

Laptop computer price example
In the U.S.,
Dell Inspiron N4010 Laptop:  $575, i.e. less than 700,000 KRW.
Intel i3 Processor
4 GB RAM
500GB HDD
14.1 Inch Screen
Windows 7 Home Premium 64-Bit

In Korea, the equivalent computer costs:  1,150,000 KRW i.e. $1000.
This computer has 2GB RAM, and a 250GB HDD.  It has the same processor and the same size screen.  In addition, the Windows 7 version is the 32-Bit version.

In other words, the computer in Korea costs over 50% more than a computer with greater capability and storage size.  There is no reason for Koreans to tolerate this.  It is perfectly legal to go to another country, and buy a laptop.  You may say that there is the cost of Windows 7 and keyboard issue.  Both can be easily overcome in Korea for minimal cost.  Even if you purchase a legal copy of Windows 7, that would cost less than $150.  The keyboard issue?  Go to Link-O and buy the stickers for 2,000 KRW.

If Korea did not have the technology to produce these final products, that would be one thing.  However, these computers are designed and either manufactured in Korea or nearby Asian countries.  There is no reason that the price of more advanced computers shouldn't be lower, not higher, than in the U.S.  The victims of this price-gouging by LG Electronics and Samsung?  Everyday Koreans, many of them students.  So the irony here is that Korean companies are making the cost of educating Korean citizens higher, when many Koreans cannot afford to pay for all of the hagwons that they must attend.

The Seoul Gyopo Guide finds this as one of the most Annoying Things About Korea.  There are others, which will follow.  Some will be controversial, and others will be obvious.  This over-pricing of laptop computers is painfully obvious.  Many Koreans travel overseas or to other countries these days.  My suggestion?  Go to a local electronics store in the foreign country and buy the laptop there, and save yourself the 300,000 KRW.

Korea's Embarrassing Behavior Regarding the KEB Sale is Now Finally Over

Today, Reuters reported that Hana Bank, with potential financial backing from Goldman Sachs, Carlyle Group, and KKR, will purchase KEB from the the U.S.-based private equity firm Lone Star.  This potentially removes the black eye that has scarred Korea's reputation on the global financial stage.

The positive?  The courts ultimately used proper law and economics principles to uphold the lawful sale.  It was refreshing to see that the Korean legal system actually used financial principles in denying the appeals to the eventual sale of KEB to Lone Star.  As The Lost Seoul has stated here, the fact is that there were NO other buyers for KEB's assets at that time.  As a result, the concept of "fair value," especially when a company is under extreme financial distress, was almost impossible to ascertain. It doesn't really matter if you believe that your used car is worth $5000 if the only willing buyer is willing to pay $2000.  The "fair price" is...$2000.  For the appeal to suggest that there was manipulation of what the "fair price" was is totally irrelevant.  The Korean legal system has upheld this basic economic principle. 

The negative?  This entire process exposed the relative infantile nature of Korean corporate and societal behavior to the world.  If KEB failed in 2005, after KEB had been sold to a foreign buyer, would Lone Star have a case if it tried to negate the sale after the fact?  No.  In the U.S., private equity firms tried to buy very large stakes in Washington Mutual during the financial crisis.  There was no public uproar which sympathized with the buyers.  It is especially the case after the deal had been completed, and approved by governmental officials.  If Korea wishes to jon the first world at the level equivalent to the world-class products that it produces, then it must follow internationally-accepted (and logical) rules of international trade.  Financial transactions are different than when a person buys a new car.  In that case, the car may have production defects.  Those defects are guaranteed to be fixed by the manufacturer.  However, the price of the car is up to the buyer to determine, i.e. if the buyer believes the car is too expensive, he/she buys a different model.  In the future, Korean governmental officials must make sure that it has the appropriate measures to approve financial transactions, and the government must uphold its own decisions, even if politically unpopular.  Not doing so has made Korea look silly on the international stage.  Let's hope that this does not occur in the future as Korea continues its march to the upper echelon of the global economy.

Korea-US FTA: Why Hasn't This Passed Yet? Both Sides Are Being Equally Ridiculous

The leaders of the largest 20 economies in the world are going to gather in Seoul this week.  Presidents Lee (South Korea) and Obama (United States) have been trying, at various speeds over the past 3 years, to ratify the the Korea-U.S. (KORUS) Free Trade Agreement.  Apparently, according to Reuters, there are two areas where disagreements still exist: autos and beef. 

It's hard to decide whether South Korea or the U.S. is being more ridiculous in this 3-year delay:  let's just call it a draw.

Autos
Ford took out a full page advertisement against the KORUS FTA late last week, with claims that Korean manufacturers would be allowed to ship 52 cars to Korea for every American manufacturer.  This advertisement has received a fair amount of publicity in the United States' press, including from think tanks, and via newspaper coverage.
Most people in the United States are well-aware of Ford Motor Company's dramatic strides.  It declined government aid during the financial crisis and bankrupcies of both General Motors and Chysler; now Ford is generally-considered to be the best managed U.S. auto manufacturer.  Equity investors have been handsomely rewarded as well:  Ford stock has risen by 62.1% in the past 52 weeks alone.  Senator Carl Levin, Michigan Senator, has also voiced concerns to support his contituency.  American complaints against the  KORUS FTA concern tariffs, and adherence to emissions standards.  Not only are both areas without merit, but neither addresses the fundamental problem:  Korean consumers won't buy a Ford passenger car in large numbers anytime soon.

This is a quote from the Reuters' article,

"Levin and others had advocated the United States phase out the 2.5 percent U.S. auto tariff over at least 15 years, but allow for a quicker elimination if sales of American cars to South Korea hit certain levels." 

Linking the elimination of U.S. tariffs to the level of American car sales to Korean consumers?  Let's be frank and honest here:  the U.S. auto manufacturers are worried about the increasing market share of Hyundai and Kia in the U.S.  That's it.  GM is silent, which is being interpreted as neutral.  Do you know why?  In Korea, GM owns Daewoo Motor, which failed as a result of the Daewoo Group's enormous debt, coupled with the Asian currency crisis.  So GM, if it complained a la Ford, GM would be criticizing itself. 

For its part, Korea should also drop any price barriers, and let Korean consumers decide.  Ford would have a long, long way to go:  it has no dealer network, no maintenance facilities, and most importantly:  what Koreans would buy a Ford Focus instead of Hyundai Elantra for essentially the same price?  There will be some, of course, that want to buy as a result of being different.  That would be the extent of it. Until a foreign-made product is unquestionably superior, everyday Koreans won't buy it.  One day, take a Korean Air flight from Seoul to the U.S.  Do you see all the Koreans onboard?  They pay, easily 10% higher prices for a ticket on Korean Air than on United Airlines or Delta Airlines.  Nevertheless, those seats do not go unfilled.  Long gone are the days when Korean-made products are objectively inferior to American counterparts.  When you add this simple fact to everyday Koreans' affinity for domestically-made products, Ford has a long uphill battle.  It knows this and that is why it wants to tie the phasing out of the 2.5% U.S. auto tariff to the level of American car sales. 

On emissions standards, the complaints of American manufacturers are easily answered by one simple statement.  Lexus, Honda, BMW, Audi, and Mercedes-Benz all comply with Korean emissions standards.  We can have all sorts of other discussions about the inequity of Korean emissions standards, etc.  None of them matter in the least.  Other, foreign-based automanufacturers know the laws, and comply. 

In short, the U.S. objections do not make a lot of sense.  They reveal two worries: the loss of domestic market share, and the inevitable failure to gain a foothold in Korea.

Beef

Koreans love the idea of conspiracy, and do not quite understand the power of the fear of litigation.   There is good reason for this.  The large conglomerates (chaebol) have dominated almst every facet of Korean life for as long as anyone can remember.  When there is a production problem in some area which causes illness, there is little recourse for a consumer to complain, or sue.  A couple of years ago, it was found that some lunches prepared for schools was defective.  There was little press coverage, and no report of compensation to the students. 

The nature of the complaints against U.S. beef, in The Lost Seoul's view, are tied to this lack of belief in consumers' rights.  There would not nearly be the "fear" of BSE (mad cow disease) if Korean citizens fundamentally believed in the concept of consumers' rights.   Think about U.S. corporations' actions.  If you think about the recent over-the-counter drug epidsode, the manufacturers pull everything off their shelves immediately.  Why?  The public good?  Yes, you can make that claim, and the companies certainly state that.  However, it is a fact that there are HUGE legal liabilities that need to be avoided.  To everyday Koreans, this is not a part of the psyche. 

The fact is that Americans eat beef of all ages, without knowing the age, and without asking any questions.  If there was a problem that was known by the company responsible, the legal consequences would be severe to the point of potential extinction of the company. Have any Americans asked at a restaurant, "How old is the beef that is being served in this dish?"  Nope. 

There is the issue of wagyu, which is similar to Japanese kobe beef.  It is indeed tender, and expensive (although not as pricey as kobe).  Korean objections to American imports as a result of potential are also pointless:  the number of Koreans that insist on buying, or choosing restaurants because wagyu is being served are relatively few, and they won't change their consumption of wagyu because of the fact that there is filet mignon available. The downside of the tariffs on U.S. beef?  Inflation on existing products.  Food inflation is a major problem in Korea.  Any Korean complaints against the import of U.S. beef are outweighed easily by the benefits that everyday Koreans will enjoy due to greater supply, and lower price inflation.  Even if this benefit were small, the average Korean household would benefit. 

Not suprisingly, special interest groups are blocking the passage of the KORUS FTA.  They do so without merit, and at the cost to both American and Korean consumers. 

Canada Blocks BHP's Bid for Potash Corp., Protectionism is Alive and Well, and Korea Should Learn the Rules

Canada Blocks BHP's Bid for Potash Corp., Protectionism is Alive and Well, and Korea Should Learn the Rules

A few hours ago, Canada prohibited Australia-based BHP Billiton Ltd's bid for Canada-based Potash Corporation.  To some, this is a sign of protectionism against a foreign buyer of a "national treasure."  To some, this will come as a suprise.  The Lost Seoul doesn't think this is suprising, and that the international community's response to this decision will be muted. 

This type of ruling has a long list of precedents, from a variety of different countries. In France, then Finance Minister Sarkozy publicly stated that investors could forget about trying to take over Alstom, the maker of high-speed and subway trains. In China, Coca-Cola had to cancel its plans to buy Huiyuan Juice after the Chinese commerce ministry blocked the deal on anti-trust grounds. In Canada, there was a point in time when it was speculated that jet-maker Bombardier was for sale but that Canada would not approve. In other words, blocking an M&A transaction due to the "national interest" is hardly a new concept.

In Korea, the most famous case involves Korea Exchange Bank (KEB). It was sold to a U.S.-based private equity firm Lone Star. However, once the economic recovery in the early 2000s took hold, Koreans complained about the sale to a foreign investor, and the court system attempted to block the transaction after it had been agreed upon by both the buyer and seller. In addition, it had cleared all regulatory scrutiny. It was only after the uproar occured that the legal challenges to this particular began.

There are two points here. First, the concept of protectionism in the "national interest" has superceded the rights of shareholders in the past. It has been done before, and it will certainly occur again in the future, particularly if the company is involved in the procurement of natural resources. Every nation is wary of China's increased economic power and its natural resource needs. Second, protectionism, even though it has a very unfavorable implication, does not result in an international halt of trade. It is most likely the case you have never heard of the Alstom or Bombardier cases.

Nevertheless, the Korean case stands out because the attempted blockage of this particular cross-border M&A transaction occurred after the approval had already been granted by governmental authorities. That is what has given Korea the "black eye" in that case, and if Korea would like to exercise its "national interest" rights in the future, Korea needs to do so in advance of final approval by the authorities, as has occured in Canada. Interestingly, there was another US private equity firm that extracted far better terms for the Long-Term Credit Bank of Japan.  However, Japan did not try to formally block the deal.  When Korea matches the global standard in financial transactions, then its arrival among leading economic powers will begin to take shape.  Until international players believe that they understand the rules that Korea follows, there will remain the lack of respect that still exists as a result of the KEB situation.  At least Canada announced its protectionist policy in advance.  Like it or not, the world will have to tolerate Canada's decision, and soon it will be forgotten because it has blocked BHP's bid.

The Fed Had A Shot to Get it Right By Mimicking Korea: Facing a Total Economic Collapse, KAMCO Saved Korea

Last week, this article appeared in the New York Times/Reuters Global Business Section which was suggesting that China follow Korea's path in order to increase the per capita GDP.  It was quite complimentary regarding Korea's reaction to the economic crisis of 1997-1998..  It does point out that the linkages among the different subsidiaries within a single chaebol were indeed broken, and that led to a path where a sustained economic recovery could ensue.

Here is the quote:
South Korea, though, after nearly defaulting on its debts at the end of 1997, pulled itself together and resumed its march up the value chain.
The key reason is that Seoul embarked on far-reaching market changes. In particular, the government reduced the power of the chaebol, the sprawling debt-heavy conglomerates whose links to the state created the impression that they were too big to fail.

Close, but not quite.
There is no doubt that the tangled web of the related companies of the large conglomerates was larely unwoven.  However, the conclusion that the government reduced the power of the chaebol isn't quite accurate.  There are a number of reasons that this is an inadequate description of what actually occurred.

First, and by far the most important, fact is that bad assets, whose value was only worth a few percentage points of reported book value, were cordoned off into the Korea Asset Management Corporation.  This included assets such as real estate, failed banks, and distressed companies.  Those assets were then correctly valued by the marketplace (although in the Goldstar/KEB case, this has been a very long, drawn-out process), and sold in a controlled fashion.  The analogy to KAMCO was the "good bank/bad bank" proposal that surfaced, and ultimately rejected, in the US during 2008. 

Second, the untangling of the cross-holdings of the debt issued by the related companies of the chaebol was absolutely key.  It wasn't that the influence of the chaebol was diminished per se.  It was that the financial viability of performing assets was more indentifiable by the market and that capital naturally flowed to the most desirable, and now relatively tangle-free, companies.  The best example of this was the Hyundai Group.  Perhaps more important than Hyundai Auto, which was already well-known to the world at that time, was the fact that Hyundai Heavy, the largest Korean shipbuilder had an extremely complicated financial relationship with Hyundai Group.  As a result, an investor of any sort, whether a lender or a shareholder, didn't quite know to where capital was allocated.  Once the tangled web was unwoven, then capital correctly chose the "winners" and the market let the "losers" fail.  Now, it did so with obvious governmental support at that time, but it did so nonetheless.

Third, the effect on Korean banks was that they too could report more accurately their exposure to specific Korean entities. This cannot be understated.  In the Korean language, there is a saying which is loosely translated to "money turning around makes more money."  In English we would say "you need to spend money to make money," or something like that.  The cleansing of the balance sheets of Korean banks made it possible for lending to resume, and importantly, to resume to entities without the spectre of a debt and stock cross-holding nightmare. 

Fourth, the article seems to minimize the dominance of the largest Korean chaebol.  Perhaps that is the view of a foreigner who has not spent a long time in Korea with Korean natives.  There have been, of course, gradual changes.  Nevertheless, the dominance of the largest Chaebol remains.  A viable explanation for the lack of a Korean "Steve Jobs" leader is that even if a pioneer had a vision, and a product that reflected that vision, that the business execution of that vision is made almost impossible because a chaebol would either buy that business before it grew into its own individual entity, or a chaebol would effectively crowd out the potential new competitor due to the dominant links to the retail chain, or that the visionary would thrown in the towel under the weight of potential competition and sell his/her idea too early to a large chaebol group.  Currently, a very compelling argument can be made that the underemployment of the very highly-educated Korean college graduate population is the result of lack of entrepreneurship opportunities which are effectively squealched by the chaebol.  Instead, Korean college graduates, faced with increased competition for few cherished jobs at the chaebol, instead opt for yet another degree to try to prove their worth to these dominant corporations.  Whether that is intentional or not is not the issue:  that it occurs is a fact.  That creates a viscious circle where the next student wants to obtain yet another, more advanced degree.  The result:  enormous structural underemployment. 

In short, yes, the NYT is accurate in that there have been large reforms in Korea since 1997-1998.  However, the nature of those changes, and how they supported the Korean economic revival, are slightly off the mark.  When history is written on Japan (over the past two decades), China, and the US during this period immediately following the financial crisis of 2007-2008, The Lost Seoul believes that sub-optimal growth occuring is because an opportunity was missed.  Korea seized that opportunity by cleaning its own balance sheets as much as they could have been, and creating KAMCO.  Then and only then could the improved global competitiveness of Korean products be fully recognized. 

The Lost Seoul

Aye, There's the Rub: Korean Inflation Hits 20 Month High While the US, Europe, and Japan Fight Deflation

One week ago, Korea reported 3rd Quarter GDP which exhibited a slowdown on a quarter-over-quarter basis.  On that basis, the Bank of Korea has resisted calls and predictions of raising domestic interest rates.  The result has been a Korean Won which has been weaker than would have otherwise been expected.  The Lost Seoul has reported that the weak Korean Won, particularly when compared to the Japanese Yen, has greatly helped the performance of the largest Korean corporations.

As posted here, The Lost Seoul has suggested that while the KOSPI has risen to three-year highs, and unemployment is the lowest of all OECD nations, the average Korean isn't happy, largely because of rising inflation, particularly of food prices.  Weather has been particularly unkind to Korean farmers this year:  even cabbage which is used to make the most famous Korean food, kimchi, has been in short supply.  Today, that anecdotal evidence was confirmed:  Bloomberg reported that Korean inflation is the highest it has been in 20 months.  This makes the Bank of Korea's job more difficult.  As was posted previously, The Lost Seoul described how the "wealth" effect, was not being shared among average Koreans.  Inflation, in all forms, usually increases prices of all goods, relatively speaking.  That is not the case in Korea, however, and thus, the average Korean does not feel wealthier, which leads to less consumption.

First, wage inflation is kept low by the ongoing underemployment (described here), particularly among young people in their early 20s.  Second, the real estate market has remained subdued, at best.  Third, employee participation in Employee Stock Ownership Plans (ESOPs) is low.  Why does this matter?  It matters because the largest Korean companies are the largest, by far, employers.  As the KOSPI has risen to 3-year highs, the wealth effect due to increases in equity prices are not being shared by the employees.  As a result, the employees' purchasing power has risen to meet inflation.  Perhaps you could suggest that this is the case in the United States as well, except there exist far more developed pension plans, which are some of the most important equity owners of US equities.  As a result, employees at US corporations can actually see financial statements in which the value of their equity holdings will increase as the stock market rises.  The same cannot be said about Korea, so the "wealth" effect is small, and almost non-existent.

For the Bank of Korea, the spectre of stagflation has now appeared.  Stagnant economic growth coupled with inflation equals stagflation.  The global imbalances, if they persist, continue to make the outlook for the Korean economy shaky in the short-term, despite hard-fought gains made in quality and global competitiveness.  The Bank of Korea may have its most delicate balancing act in the months ahead.  No wonder it has not made violent moves in either direction, which would only increase the instability.  Small countries like Korea must wait and see what the effects of these global imbalances on Korean corporations, and as an extension, the Korean economy.

The Lost Seoul

영어 Hall of Shame Entry #3: LG English Speaking Twitter - LG 영어 대화/연습 트위터 모임 is a disservice

영어 Hall of Shame Entry #3:  LG English Speaking Twitter - LG 영어 대화/연습 트위터 is a disservice

I don't know whether to laugh or cry.  I'll try to do neither, and I will just be embarrassed that these type of people still exist in Korea.  Here are his details, and they can be found here.  I could (and should) create an entirely new blog on the number of reasons that I entirely disagree with this person's attitude.

Here is an actual sentence from the description of the group: 
혹시 Native 수준의 직원분들 자랑하러는 오시지 말세욤~.

This person, I believe, is serious.  Here are some of the perspectives from which I totally disagree. 
1.  Tell me Mr.  Jeong, how is it exactly that you or the people will improve if you do not learn from experts?  Let's say that I wanted to learn Korean, should I learn from an Englishman who studied for a couple of years at 연대?  I strongly doubt that you can answer "yes" to that question.

2.  눈치때문입니까?   웃긴 것 치지마세요.  What good would it do to show off to total strangers who will have no effect on my future, earnings, or anything else?  Instead, you are worried about a native speaker showing off?  In exchange, you will accept non-perfect English language advice.  It is ludicrous that this attitude exists and it I do not believe (because I have seen it) that Mr Jeong's attitude is his alone.  눈치 itself limits the progress of Korea.   It certainly has no place in learning a foreign language.  저의 눈을 볼 수 없자나요.  그래두 이렇게 생각하세요?  Unbelievable. 

3.  If you really want to learn English, here is my sincere advice.  Leave your ego at the door (means "Forget about your ego"), and ask me any questions that you may have, at any level.  I have exchanged advice and received grateful messages when I have done so.  I appreciated the kind messages I have received.  There is no such thing as 눈치 on the internet because we do not know each other. 

I must protest, and will continue to do so when I have seen something this blatantly disserving all Koreans.  Mr. Jeong, twitter id FR33SOul, you are the recipient of a place in the 영어 선생 Hall of Shame.
The Lost Seoul