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Lessons from South Korea’s Chaebol economy

South Korea is Australia’s fourth largest trading partner, with the relationship likely to grow under a new free trade agreement. flickr/Emmanuel Dyan

The trade deal signed yesterday between Australia and South Korea is being promoted as a win by the government for the benefits if will bring to Australian industries including agriculture, automotive, services, resources and energy, and manufactured products.

South Korea is Australia’s third largest export market and fourth largest trading partner with a trade value of A$32 billion in 2012, meaning the ‘KAFTA’ deal may be seen as a significant milestone for the Abbott Government.

But what can Australian businesses learn from South Korea, given some sectors, including car manufacturing, may view it as a competitive threat?

South Korea has long stood out in Asia as a success story of political and economic transformation. The steady growth of the nation’s economy is a remarkable phenomenon of the integration of political and trade policies.

From the early 1960s to the 1990s, South Korea has had one of the world’s fastest growing economies. Though it was badly battered by the Asian economic crisis of the late 1990s, rapid recovery and the subsequent tripling of its GDP tells an unparalleled global success story.

A critical factor contributing to the growth of the modern South Korean economy was the strong leadership from the former President, Lee Myung-Bak (2008 to early 2013). Myung-Bak actively promoted innovation in trade and economy, alongside progressive social welfare and policy. He also pushed South Korea from an export-orientated, albeit heavily-protected economy, to a more open and globally engaged system.

As former CEO of Hyundai, his strategy for the company at that time was to engage with new and emerging markets such as Vietnam, Thailand and most of the Middle East. Not surprisingly, as President, he adopted similar economic policies to encourage Chaebol (the large, conglomerate family-controlled firms of South Korea characterised by strong ties with governmental agencies) to engage in diverse overseas projects including foreign direct investment and portfolio investment.

Fostering a new model

Lee Myung-Bak fostered the traditional Korean model, a heavy state intervention with a strong entrepreneurial enforcement, and pushed South Korea to be one of the major players in today’s global economy. However, of late we have witnessed a new wave of South Korean small and medium enterprises (SMEs) flowing into the global market.

Then Prime Minister Lee Myung-Bak (meeting with Thai Prime Minister Yingluck Shinawatra) has been credited with promoting innovation and leading to unparalleled economic success during his time as President. AAP/YONHAP

The focus on economic engagement with other emerging and developing countries can be claimed as another underpinning of steady growth in South Korea. Compared to the trade structure in 1971, in 2011-2012 Korea traded much less with advanced economies and much greater with emerging and developing countries. During the past four decades, South Korea’s trade with emerging and developing economies rose from 17.5% to 67%. This trend, in fact, has been helpful for the Korean economy in the long run.

During the global financial crisis, emerging and developing countries managed to maintain the growth rate and demanded more foreign direct investment from South Korea. It is even argued that investment from Chaebol played a crucial role in safeguarding some emerging and developing countries from negative spillover of the financial crisis.

With the current global economic situation, South Korea may be seen as a haven, playing a stronger role in the international trade arena. There are, however, a few concerns that may challenge the future growth of South Korea.

Future challenges

The first issue relates to international trade and the finance policies of South Korea. In early 2013, South Korea proposed to impose a broad tax on financial transactions and devaluate its currency (the Won). This sign of capital control will prompt more market selling and push the currency down.

The weakening of the Won also creates uncertainty among international investors since this action can lead to competitive currency devaluation or currency war. The Won can be further devalued the financial policies of the US, Japan, and China. The South Korean Government needs to stabilise its currency, and finance policies, in order to reinforce its competitive advantage over other East Asian countries.

The second issue dovetails with the first. South Korea will continue to innovate. We learn from the Japanese model that innovation can promote a buoyant economy. Devaluation of currency will never promote national long-term trade benefit. South Korea has one of the highest rates of spending on research and development in the world.

However, the Organisation for Economic Co-operation and Development (OECD) suggests the outcomes of R&D investment in South Korea are limited to major business. It should be adopted more frequently and widely among SMEs and those in the service industry.

Beyond the Chaebol

Much of South Korea’s miracle has been the success of Chaebol. But it’s worth questioning if a similar approach will work in the future global economy. More importantly, with the closer trade relationship between Australia and South Korea, Chaebol will potentially affect Australian business players.

With the rise of SMEs in cutting-edge technology areas such as computer gaming, design technology, and art technology, the business culture of Yon-go (relation-based informal network), that has promoted Chaebol for the past three decades may impede the growth of venture-capital businesses in these areas.

The Yon-go culture enhances relationships among business organisations. It may be useful in the early and middle stages of South Korean export-led economy. With the new forms of international trade, for which creativity plays a pivotal role to enhance national competitive advantage, Korean business and political organisations need to consider the new business approaches and policies that promote creativity from various different protagonists outside the Chaebol system.

KAFTA and Australia

KAFTA can be perceived as an international trade challenge to some Australian business sectors. It contains an Investor State Dispute Settlement (ISDS) clause which allows South Korean corporations to take legal action against the Australian government if it infringes on their trade rights. We must think twice about the impacts of some industries such as tobacco, alcohol or pharmaceutical on Australian consumers and Government.

With its strong Chaebol culture, automotive, textile, and high-technology players from South Korea will gain a competitive advantage over Australian companies. The challenge will be for Australian players to stay in the game by learning more from their new free trade partner.

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