[OUTLOOK]Dialing Back the Corporate Testosterone

For the life of me, I could not understand the philosophy behind Korean chaebol corporate life when I worked here in the early 1980s as an economic diplomat. Korean firms, it seemed, had two objectives: first, to spend enough money to show a zero profit for the year; and second, to do everything possible to eliminate their rivals. Daewoo would happily go into bankruptcy, it seemed, if it could only drive what was then Lucky Goldstar out of business first.

After seeing that competitive fire at first hand, the tight control that economic ministries kept on the economy made sense; the government's role in a mixed economy is to act as a referee and level the playing field. In Korea's logical extension of that theory, Seoul's role was expanded to that of preventing the chaebol from ruining themselves.

Although I never put such thoughts into official dispatches, they served as a reasonable schematic to understand what was going on in the days when Hyundai's founder and his brother were jousting for industrial supremacy, but would join forces long enough to bang Samsung's Lee Byung-chul around the head and shoulders when they could.

Another element of the economic system in those days was the Confucian elite that controlled the economy from the Economic Planning Board and the Finance Ministry, both then housed across from the Sejong Cultural Center. I recall sitting in a division director's office shortly before Chuseok one year, discussing some policy matter or another but being constantly interrupted by a string of company presidents in the industry this fellow controlled － all of them paying their respects to a man 15-20 years their junior. Although that seemed not quite Confucian, I was envious of his bureaucratic clout.

Little seems to have changed in the intervening 20 years. Then, the Finance Ministry painted glowing images of how liberal Korea's banking regime would be just as soon as per-capita GNP exceeded $1,000. These days, we hear that Seoul will liberalize the banking regime just as soon as bankers are ready to take on the job of running it themselves. Although the "Kwanghwamun gang" are now "the boys from Kwachon," they have retained most of their power despite the dangers inherent in government tinkering in an economy the size of Korea's. And in 1980, trading partners still looked somewhat benignly on the "little economy that could," overlooking its GATT-related offenses and pointing to it as a Third-World model. That forbearance has been replaced with a more critical eye.

Neither do Korean businessmen seem any less wildly competitive than they were in the early 1980s. Speaking recently of overcapacity in the computer chip industry, the Economist magazine quoted a Tokyo industry analyst as saying, "All other Asians are gradually turning South Korean. The symptoms are compulsive building of excess capacity and a firm belief that no matter how far prices drop, if they only add even more capacity, things will be OK."

Today a debate rages over whether conglomerates should be allowed to expand their financial holdings in other firms and increase their debt-equity ratios.

Why should they? Last year, Korea's chaebol reported aggregate profits of less than one percent in non-financial operations, and their debt ratios ranged between 200 and 300 percent. That kind of leverage is a recipe for disaster whenever the economy turns down and a roaring economy can no longer support the required debt service costs. Indeed, it does not take a true recession for an economic crisis to break out here. If growth falls below 5 percent on so, the gearing takes over, firms rock on their foundations and Seoul scrambles to pour in more bailout money.

The culture of dependency must be broken somehow. Businessmen will continue to be reckless if chances of a bailout are good. They simply do not believe protestations from Kwachon that times have changed. The economic czars there, business believes, will fight strenuously to keep their divine right to run everything.

The main question, however, is what will prevent the chaebol from returning to their old habits if rules on investments and debt-equity ratios are relaxed? Have banks changed enough to resist chaebol calls for more funding? Has Seoul shown any signs of backing off from its controls?

Somehow, corporate testosterone must be throttled back a bit. Managers must learn that they cannot grow their way out of every problem, and something must induce them to keep a cash cushion available to ride out periodic hard times.

Ideally, Seoul would tell banks and businesses, "No more," and quit its support cold turkey. But that's hard to do, and if you think it will happen, I own a big building with a blue-tile roof just north of downtown Seoul that I'd like to sell you.

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The writer is a deputy editor of the JoongAng Ilbo English Edition.

by John Hoog