Hasung Jang is one of Korea’s leading activists for political reform, particularly through his advocacy group, the People’s Solidarity for Participatory Democracy. Jang, who has a Ph.D. from Wharton, is also director of Korea University’s Center for Finance and Banking and a persistent critic of the economic system that has hobbled Korea’s attempts at economic reform. He has been especially disparaging of the South Korean chaebol, or conglomerates, whose business practices contributed significantly to the economic crisis that nearly destroyed the country in 1997-98. With the historic unification talks in June between the leaders of North and South Korea, Jang’s efforts to bring both political and economic reform have become more urgent and more complicated. In an interview with Knowledge at Wharton, Jang shared his views on the unification process and what it will mean for Korea’s domestic economy as well as the international business community.
Hasung Jang is one of Korea’s leading activists for political reform, particularly through his advocacy group, the People’s Solidarity for Participatory Democracy. Jang, who has a Ph.D. from Wharton, is also director of Korea University’s Center for Finance and Banking and a persistent critic of the economic system that has hobbled Korea’s attempts at economic reform. He has been especially disparaging of the South Korean chaebol, or conglomerates, whose business practices contributed significantly to the economic crisis that nearly destroyed the country in 1997-98.
With the historic unification talks in June between the leaders of North and South Korea, Jang’s efforts to bring both political and economic reform have become more urgent and more complicated. In an interview with Knowledge at Wharton, Jang shared his views on the unification process and what it will mean for Korea’s domestic economy as well as the international business community.
Knowledge at Wharton: Regarding the recent developments between North and South Korea, do you believe that the North is genuinely interested in unification, or are there underlying political motives involved which need to be considered?
Jang: Certainly there are politics involved on both sides. Up until the summit, however, both the North and the South looked at themselves as ‘good’ and their counterpart as ‘evil’. In a sense, neither would acknowledge the other. There is no doubt the people of the South wanted unification but thought that the North Koreans [were not interested]. Now, because of the summit, I believe that the North Korean people are also willing to unite and that their intentions are genuine.
Knowledge at Wharton: In the event of unification, what will be the impact on the two economies, particularly with regards to South Korea’s technology industries?
Jang: Many suggest that Korean unification will put an economic burden on the South. But there are opportunities and benefits as well. I think it’s true that the costs exceed the benefits in the short term, but in the long term, the benefits will far exceed the costs. The North probably has the most disciplined, well-educated labor force. They lack the technologies and knowledge of a market economy but their craving for a better life is no different from that of people in the South.
It will take quite awhile. In the early stages, the South will have to give something first and not expect to get something in return soon. But if we help North Korea develop their economy and if South Korea is able to achieve high economic growth … in the long run we are all better off.
Knowledge at Wharton: How do you think foreign investors will react to unification?
Jang: North Korea has one of the worst investment environments. There are no guarantees, no market systems, no banks. International investors have a lot of risks to bear. South Korea must play a role in taking some of those risk burdens off foreign investors’ shoulders, either through government intervention or through the private sector.
Knowledge at Wharton: What will be the costs of unification in terms of productivity or employment?
Jang: In South Korea, unemployment will immediately jump to over 10% or even 20%. And [the fact that] South Korea’s standard of living is now ten times higher, in terms of average income, than the North’s will create social tension between the two.
Knowledge at Wharton: Do you think there are similarities between unification in Korea and unification in Germany?
Jang: There are many similarities, but there are also many differences. The North Korean regime is much more centralized and more autocratic, and faces worse economic conditions than East Germany. In addition, there has been no form of communication between North and South Korea, unlike East and West Germany.
In the early stages, I think we will face more problems than did East and West Germany. However, development between North and South Korea is different in the sense that North Korea is now on the verge of economic collapse. It has no other options. It tried very hard to get assistance from the United States and Japan, which ended in failure. South Korea is the only place it can go to ask for help. Certainly it risks losing face or losing internal control, but depending on how things proceed, [unification] can be orchestrated and well planned.
In addition, the border between East and West Germany collapsed suddenly. Even though West Germany had prepared for that for a long time, it was not in a position to absorb all those shocks. But North Korea is maintaining tight control over its system despite all the economic problems.
I think we will do better. I don’t think the border will be opened in one day. It will be a much more gradual process.
Knowledge at Wharton: Despite talks about unification, South Korean President Kim was unable to win a majority in parliament in April’s elections. So what impact will that have on his agenda for economic policy and reforms in the last three years of his presidential term?
Jang: He certainly has less leverage than he did when he was elected. In addition to that, the focus on the North/South summit somehow left the reform process behind. So we are running into another risky situation …
But this time there are more domestic developments [to rely on]. We have worked hard to reconstruct the financial sector. We have spent half the sum of taxpayers’ money to clean up non-performing loans out of the banks, and we have done a reasonably good job changing laws and regulations governing some of the business structures, particularly corporate governance. However, the chaebol are far stronger than anyone ever thought, so all this reform effort hasn’t really crossed the river of no return yet. In other words, it can always roll back if the government loses its leverage. This is particularly true because many of the reforms we have accomplished in the last two-and-a-half years were done under government pressure rather than market pressure. And the market hasn’t yet fully developed in a way to build up its own self-functioning system. So if [President Kim] loses his political leverage then reform may [suffer].
Knowledge at Wharton: How critical is it for Kim to form a coalition government?
Jang: That’s probably what he’ll have to do. Unfortunately, unlike at the beginning of his government, no matter how the coalition government is formed, it won’t be as effective as it was at the beginning of his term.
Knowledge at Wharton: Until the market is in full force, what needs to change?
Jang: Let’s start by looking at the causes of this crisis. Then we may find a solution. Banks lost credit in the international financial community for two reasons: First, they didn’t have the reserves to pay back short-term debt; second, they were sitting on top of a huge amount of non-performing loans, which was a problem many in the foreign investment community thought could be fixed. But after the fall of Kia Motors, investors began to believe that South Korea didn’t have the self-correcting functions to clean up the mess in the financial institutions, particularly in the commercial banks.
There are two kinds of bank borrowers, households and corporations. We now have only a few retail banks, those that engage in household lending, but all of these are coming out very strong, including Hana Bank and Korea Housing Bank.
So the root causes of this crisis come from the corporate sector which has lost its competitiveness. … The international market has cut off all credit lines from foreign banks. That has spread into foreign exchange rates … reserves have dried up. So unless we really do a job restructuring the corporate sector, particularly the chaebol, no amount of taxpayer money poured into the banks and financial sector will fix the problem. Every month we come up with new non-performing loans, which are getting bigger and bigger. And then people begin to wonder why things aren’t getting better.
Yes, the economy is coming back very strong, but if you look at the figures, only those who have done a reasonable restructuring job at the early stage of the crisis are [doing well]. All those who haven’t done anything, such as Hyundai Group, are creating more headaches. So we have to fix those structural problems in the corporate sector, particularly in the chaebol.
Before the crisis, chaebol never failed, not because they were profitable, but because sister companies were helping them out. Even today, some of Hyundai Group company’s operating income is not enough to cover its interest payments. And it is still operating.
Knowledge at Wharton: What about the impact of the small and mid-sized enterprises?
Jang: Chaebol restructuring in the end should produce an economic system where small and medium-sized enterprises play a role at least equivalent to the role of the chaebol. One of the most harmful aspects of the chaebol structure has been the absence of more creative entrepreneurs. If the chaebol saw even a small opportunity, they jumped into it because they already have everything in place: human resources, money, connections, networks. You can hardly find an industry in which a chaebol is not dominant, including advertising. Samsung has 60 affiliated companies. They say, "Why would we give these jobs to anyone else? Why don’t we do it?" They see opportunities in department stores or distribution channels … They make automobiles, ships, television sets, flour, sugar, cosmetics. You name it.
Sony alone is bigger than Samsung’s whole group. While Sony is doing electronics-related businesses, Samsung is doing everything from hotels to airplanes. When you say you can do everything, it means that there’s not even one thing you can do the best. They are not specialized. I’m not saying that specialization is the best strategy for the companies, but if they are in 30 different kinds of businesses, I don’t think they can be competitive in the international community.
Knowledge at Wharton: But the chaebol have no incentive to change.
Jang: That’s the problem. The controlling families have no incentive to change … I don’t expect we can achieve chaebol reform in a few years, It will be a continuous process, but developing capital markets will be the fastest way to do it.
Knowledge at Wharton: What will be the single, most effective way to change the chaebol?
Jang: A hostile takeover. I haven’t seen a single hostile takeover yet in Korea. I’m dreaming of a company taking over a big chaebol company through a tender offer in the market, which would wake up everyone at once. It will certainly shape up the chaebol.
Knowledge at Wharton: Once Korea’s markets are open, won’t companies have to specialize in order to survive?
Jang: Yes, in which case small and medium-sized companies can play a bigger role … In the area of Internet and telecommunications technologies, for example, very strong new small-sized companies are growing and gaining footage.
Since the 1997-98 crisis, we have had many new companies. Just look at the Kosdaq. There’s a question as to how inflated their valuations are, but that’s not what’s important to me. To me, what is important is that these companies started their businesses. The crisis opened new doors.
Knowledge at Wharton: You’re working hard to get shareholders to understand their rights.
Jang: The corporation is an economic form of a democracy … When the controlling family takes money out of the company, even the owner of just ten shares can complain and file a suit against them. Now that the Korean economy is on the verge of getting into developed markets, even blue collar workers are accumulating wealth. Everyone now has some savings and investment, so it’s not just about consumers’ rights or workers’ rights. [People] are more concerned about protecting their own wealth in stocks and savings. It is in the interests of the general public to protect their assets.
Knowledge at Wharton: What have been the developments with regards to regulations and the role of the government since the crisis?
Jang: I credit the government with changing laws and regulations over the last two-and-a-half years. If we didn’t have a crisis, it would have taken another 20 years to bring those changes about.
But progress has [been slow]. We just changed the frame. Now we have to fill in the structure with details. How do we do it?
Let’s take an example: Cumulative voting, so that minority shareholders can elect a member of the board. We introduced it, but also gave companies the freedom to exclude it by changing their articles of incorporation. So naturally, every chaebol company excluded it. The cumulative voting system became totally ineffective. Now we are talking about making it mandatory. The Russian experience says that cumulative voting is working very well there. At least one member of the board represents the minority shareholders. It may be a very small example but it serves as a very critical and important feature of minority shareholder rights protection. I’m pushing very hard to have the class action suit as a part of our legal system. Without a class action suit, someone can manipulate a stock price and there’s not much you can do about it, unless tens of thousands of people file a suit at the same time, which is practically impossible. So even with stricter regulations, there are a lot of stock price manipulations.
Knowledge at Wharton: How should foreign investors perceive Korea’s long-term potential?
Jang: I believe Korea has a good industrial basis. It has a reasonably talented, hard working, well-disciplined labor force. That is why Korea has achieved such rapid economic growth in such a short period, despite the absence of natural resources … And now Korea is part of the OECD and the WTO, so for everything we export, we also must import.
Human capital is the real engine for economic growth. And I think we will enjoy this resource for quite awhile.
On average, Korean companies are severely undervalued. There are a lot of bargains. Even a company like Samsung Electronics, which is the most efficiently-run and the biggest company in Korea – probably one of the few Korean companies which international investors view as an international company rather than a local Korean company – has a current share value that’s less than half of the fair value in the international community. Investors don’t have confidence in corporate governance. But it’s not undervalued if you take into account those corporate governance risks. So if we get rid of these risks by improving transparencies and accountabilities [so they conform to] international standards, then with the same industrial base we can easily double our value.
I offer one simple example: Korea Telecom, which has a monopoly on the telephone business, including the wireless telephone business. It is a monopoly in a population of 40 million. Let’s compare it to Singapore Telecom, which has a similar monopoly in a population of just 4 million. Korea Telecom has a market ten times bigger than Singapore Telecom, and yet their market capitalization is smaller than Singapore Telecom. So, Korea Telecom is one-tenth of Singapore Telecom’s value. In other words, if we improve corporate governance with the same output, we can easily increase our value.
Korea provides a great, great investment opportunity for the international community. When Daewoo Motors failed, GM, Ford, and every major auto-maker in the world wanted it because it had good facilities and a good, well-trained labor force. This situation applies in other industries also. Koreans are hard working and well motivated, so we have the potential … The question is whether we can change our system to fit into the new open economy.