Home > Opinion > Columns

[OUTLOOK]Industry, capital and crisis

Let’s go back to 1997 and look at the Korean economy right before the financial crisis. Hanbo Steel went bankrupt, Kia Motors was on the verge of bankruptcy and Daewoo Group’s “global management” initiative was in jeopardy.
When the financial crisis hit the Korean economy, the excessive investments by Korean companies came under fire. Korean companies were criticized for have courted the financial crisis by making more investments than they could afford. As a result, companies began intense corporate restructuring efforts and the banking sector, which had overlooked the investments, underwent major reform.
Now that the restructuring is finished, let’s go back to the issue of excessive investments again. Hanbo Steel had ventured a large-scale investment because it had anticipated an economic boom in China. The company’s judgment was accurate. In the last three to four years, China has imported steel from around the world. Every Korean steelmaker enjoyed a surge in orders from China.
The automobile industry is also enjoying an unprecedented boom. Kia Motors, which was acquired by Hyundai Motors, maintains full operation and is rapidly growing. Daewoo Motors, now under GM, is also doing very well. When GM acquired Daewoo Motors, creditor banks gave it 10-year long-term loans, thinking the company’s financial difficulties would continue. But today GM-Daewoo has a surplus of cash and is paying off the loans early.
The fact that the companies branded at the time as having made excessive investments are now prosperous proves that putting blame on excessive investment during the financial crisis was exaggerated. Despite the “big deal” discussions, companies did not reduce the facilities that they previously invested in, and those facilities are put to good use today.
Then what really caused the financial crisis? It was not a structural problem, but one of fluidity. The long-term insights of the industrialists were mostly right. They made investments looking not just two or three years ahead but more than five years, or as far as 10 years ahead. However, the financial sector failed to keep up with the companies.
During the authoritarian regime, the government had an industry-oriented mind and created environments for long-term investments. If financial institutions lent money to companies to invest and then suffered losses, the government would make up for it. So even though companies were losing money, financial institutions supported the investments with an eye to the future.
The system collapsed in the 1990s, however, due to a rapid financial liberalization and opening. The government began to abandon its industry-oriented perspective. When companies have problems, financial institutions did their best to collect the money instead of funding them further in order to survive. Companies did not take the changed financial environment seriously. In particular, as they lent money from foreign financial institutions, companies did not have thorough plans in case the money was drawn back. The 1997 financial crisis can be called an accident in the course of adjusting to a new environment.
Then how should we have responded to the crisis? The recent recovery of Hynix is a good lesson. Hynix was under the management of creditor banks and recovered because it was fully supported by financial institutions. If Hynix was an independent company, it couldn’t have gotten that financial support. When Hyundai Electronics, the predecessor of Hynix, was in financial trouble, banks were busy collecting funds. Financial institutions changed their attitude because there was a close link between Hynix’s recovery and their own interests.
Currently, the prevailing position in Korea is that industrial capital and financial capital must be separated. That might be right from the point of view of “supervision.” If we were to make a system within the economy to encourage long-term investments, however, there must be a close connection between industrial and financial capital. With the financial and industrial sectors separated, the short-term risk management tendency of the financial institutions and the long-term investments of the industries are more likely to come into conflict.
The Korean economy has reached the level of a semi-advanced country. Therefore, a considerable amount of capital is waiting in the financial sector to be invested in Korea. The key task that must be done to make the leap to the next level is to create a link between the industries and the financial sector so that the capital can be used for long-term investment.

* The writer is an economics professor at the National University of Singapore. Translation by the JoongAng Daily staff.

by Shin Jang-sup