[SERI COLUMN]Spineless government drifts on Lone Star

Is Korea turning into a nation of too much democracy? That is the question cropping up over and over again as we watch news reports on the Lone Star Fund and the planned sale of its stake in Korea Exchange Bank to another Korean bank.
The latest focus is on whether the Texas-based fund acquired Korea Exchange Bank at a fire-sale price by manipulating the bank’s capital adequacy ratio (or BIS ratio) and whether or not under-the-table money had changed hands in the process.
As everyone with access to newspapers and television news knows by now, the formal investigation was triggered by public outrage at the prospect of Lone Star netting 4 trillion won ― approximately $4.15 billion ― without paying a penny in taxes. It was reported that the fund gained its tax-free status as an entity registered in Belgium, with which Korea has signed a double taxation exemption treaty.
In other words, the question is whether the government started wielding the legal stick mainly to pander to people’s anti-foreign sentiments.
This is precisely what worries me. Government officials, whether elected or appointed, seem no longer capable of acting on their own will; instead, they have become mere objects shaped by what people want them to be. Of course, this is a great improvement from the bygone era of authoritarian governments. But it also points to a worrisome trend.
When officials are easily swayed by fickle public opinion instead of standing firm on their beliefs and making decisions based on what’s best for their country, that is nothing other than, to borrow Tocqueville’s phrase, a “tyranny of the majority.” This state of affairs will lead to dysfunction in the rule of law and ultimately, sheer anarchy. Newsweek editor Fareed Zakaria warned in his book, “The Future of Freedom,” about today’s obsession with democracy in industrialized and developing nations.
In the book, he said a true liberal democracy isn’t possible with free elections alone. Instead, he argued, the prerequisites for such a democracy to take root would be rule of law, institutional checks and balances, protection of private property and free speech and assembly.
Without the above preconditions, free elections would only produce populist leaders who may end up representing nationalist, racist or religious fundamentalist factions in society. In short, Zakaria cautioned, a democracy without well-developed liberal institutions will degenerate into an “illiberal democracy.”
Russian president Boris Yeltsin and Yugoslavia’s Slobodan Milosevic come to mind as such examples. Although these leaders took power through legitimate elections, their regimes were far from liberal democracies under the yardstick of equality under law and fair dispensation of law.
There is no reason for overseas investors to put their money in high-risk countries. One of the most important criteria for foreign funds in deciding to invest is whether the prospective host country guarantees the independence of its judiciary.
The reasoning is that the lack of impartial judges may deprive them of fair treatment simply for being foreigners. No matter how high the expected returns may be, investors would stay away from a country that makes indiscriminate use of threats to rough up expatriate businesspeople.
Some, however, may object to this line of argument, and assert, “Aren’t other countries doing the same thing? Even the United States, the paragon of a free market economy, has legal devices to protect its domestic industries!”
That’s true. In the United States, lawmakers passed the Exxon-Florio provision in 1988 to make it easy to restrict foreign acquisition of U.S. corporations on national security grounds. Evidently inspired by this example, Korea’s National Assembly is busy drawing up a similar plan to thwart foreign takeover attempts on businesses deemed of strategic importance to the nation.
Still, many foreign investors are skeptical. They worry that regardless of the intended law’s merits, it would be a big problem for them if the law is applied selectively and inconsistently. Before any new legal provisions are in place, the handling of the Lone Star affair will be an important test case for where Korea is headed.
Foreign company leaders doing business in Korea and those seriously mulling investment here don’t want a spineless government giving everything away in return for nothing, but one that puts in place a strong regulatory framework and enforces the rules in straightforward, transparent manner. Aren’t laws supposed to be predictable so people can easily tell right from wrong?
If any wrongdoing was committed in the 2003 Lone Star deal, those responsible ― foreigners or Korean nationals ― should be punished to the fullest extent of the law. In the process, however, the government should not give foreign investors the impression that it is catering to popular sentiment by applying the law arbitrarily. If that happens, Korea will be stigmatized as a country in which no legitimate business can be done.

* The writer is managing editor of SERIworld, Samsung Economic Research Institute’s English-language Web site.
Disclaimer: The views expressed in this column are the author’s and do not represent those of Samsung Economic Research Institute.

by Chung Sang-ho