Selling South Korea
Published Jan 29, 2010
From the magazine issue dated Feb 8, 2010
For the first time in modern history, South Korea is laying claim to lead the club of rich nations. South Korea became the first member of the Organization for Economic Cooperation and Development—the group of 30 wealthy nations—to emerge from the global recession when it recorded 0.4 percent growth in the third quarter of last year. This year the OECD expects South Korea's GDP to expand by 4.4 percent, the highest growth rate of any of its members.
Now President Lee Myung-bak wants to turn the end of the economic crisis into an opportunity. He knows the crash has accelerated the decline of American might, as well as the rise of China and other emerging powers, and he aims to exploit the gap between them. His goal is to transform South Korea from a successful but self-involved economic power into a respected global soft power with the clout to mediate between rich and poor nations on global issues such as climate change and financial regulation. In particular, Lee is pushing to revive momentum on a global free-trade deal—stalled in large part due to hostility from poor nations—while defending the poor by pushing for more international supervision of the global financial system. At the same time, he is trying to establish South Korea as a leader in the fight against global warming by agreeing that the country will cut emissions by 30 percent by 2020—one of the most aggressive targets in the world—even though it is not obligated to do so because it is still considered a developing nation under the Kyoto Protocol. To many in South Korea, the selection of Seoul as the site of the November 2010 summit of the G20—the group of 20 leading economic powers—is an acknowledgment of how well it has managed the current economic and environmental crises. "The old order is being dismantled and replaced by the new order," Lee said from the Blue House in a televised New Year's speech. "We have to make our vision the world's vision."
Lee is one of only two former CEOs to lead a major trading power—Italy's Silvio Berlusconi is the other—and he runs South Korea like the just-do-it boss he was at Hyundai, where staff called him "the Bulldozer." At Hyundai he led a company known for fearless forays into foreign markets, whether it was building huge bridges in Malaysia or selling cars with stunning success in the crowded U.S. market. Now he is trying to make South Korean culture—still on the defensive after a long history of colonial occupations—as cosmopolitan as Hyundai's culture. He's pushing for greater use of English and generally trying to open up South Korea to the world. In his first big political job, as mayor of Seoul, he created a huge ruckus when he ripped up the downtown to expose a boarded-up stream—but it is now a major draw for commerce and tourism. Lee's grand domestic ambition as president is a multibillion-dollar plan to refurbish South Korea's four major rivers despite protests from environmentalists and opposition members. Lee believes the project will boost local economies by creating jobs and promoting tourism and commerce. Lee's popularity ratings, after an early plummet driven by a decision to allow U.S. imports of beef, are now at more than 50 percent as voters warm to his vision of newly developed South Korea as a model nation to be emulated by many developing countries.
South Korea's successful management of the economic crisis surely helps. Early on, the country was battered like the rest of the world. The South Korean won dropped 30 percent in the first three months of the crisis, the stock market dropped by half, and foreign investors left in droves. But unlike most other rich nations, South Korea had recent experience with a major financial meltdown. Many of its current leaders are veterans of the Asian crisis that crippled the country's economy in 1998, and they knew how to manage a free fall. Lee's team immediately moved to save threatened banks and companies by setting up $200 billion in various funds to guarantee payment of their debts and for other forms of emergency aid. They struck currency-swap deals with major economies such as the U.S. to secure dwindling reserves of foreign currency and front-loaded public spending so that 65 percent of the country's $250 billion budget was spent during the first half of 2009, ensuring that the money got into the economy rapidly—but without adding new debts. A government focus on protecting jobs kept consumer sentiment relatively high, and the Bank of Korea cut interest rates by 3.25 percentage points to 2 percent, a historic low.
All the while, Lee worked relentlessly to quiet calls for protectionism at home and abroad, at a time when many other leaders, including Barack Obama and Hu Jintao, were beginning to succumb. Lee's administration is pushing for a slew of free-trade agreements with the U.S., the European Union, Peru, Colombia, Canada, Australia, and even China and Japan, if possible, says Abraham Kim, a Korea analyst at the political-risk consultancy Eurasia Group. Lee also lobbied hard at the Pittsburgh meeting of the G20 last year to have Seoul selected as the site of the next summit this autumn, an event he hopes to organize as a coming-out party. "He is trying to use the crisis to enhance the reputation of South Korea and help it to be widely recognized as a developed-world state," says Kim. "This is partly a nationalism thing, but more importantly, they are trying to get out from under Japan's and China's shadow. South Korea needs to find its niche for its long-term competitive survival."
South Korea was further protected from the crisis because its economy was built on pillars other than the collapsing financial-services industry. Decades of government efforts to nurture globally competitive conglomerates through massive infusion of capital had helped build export machines such as Samsung, Hyundai, and LG. As the crisis unfolded, the weakening currency allowed these companies to expand global market share, especially against key Japanese and other rich-world competitors. As a result, South Korea registered a record trade surplus of $42 billion last year, surpassing that of Japan for the first time. South Korean companies and banks were also ready to compete because the crisis of the 1990s had forced them to improve corporate governance, get their finances in order, and invest heavily in new technology. "We just had to dust off the old measures we used a decade ago and use them again," says Vice Finance Minister Hur Kyung-wook.
In short, the South Korean model is a more mature cousin of China's—a hybrid economy, part free market, part state-controlled—but with more freedom for the market and for political dissent. Now Lee is positioning South Korea within Asia as a dynamic alternative to both China's mighty command economy and Japan's no-growth economy. In Southeast Asia, South Korea has long been admired for completing an economic miracle in just one generation, moving its 48 million people out of poverty and entering the ranks of fully industrialized nations, with average per capita income that surpassed $20,000 in 2007. And, unlike China, South Korea has achieved economic and political growth at the same time, with an increasingly well-established multiparty democracy that respects free speech and election results. South Korea, says U.S. Ambassador Kathleen Stephens, is "the best example in the post–World War II era of a country that has overcome enormous obstacles to achieve this kind of success."
Many Southeast Asian nations, alarmed by the harsh sides of the China model, look to South Korea as an alternative. Vietnam is sending civil servants there, studying how in the 1970s and '80s Seoul used massive government support, such as cheap loans, to develop strategic industries such as steel and petrochemicals as the backbone of its export economy. As part of Vietnam's effort to develop capital markets, it also now runs a stock exchange in Hanoi, built with the help of the Korea Stock Exchange. Officials from Vietnam, Cambodia, Indonesia, and Uzbekistan regularly visit South Korea to join training programs that teach economic and business management. "Developing countries are eager to learn South Korea's economic model because of its relevance to them," says Euh Yoon-dae, a Korea University economist currently heading a presidential committee to promote the national brand. "Our open economic system is more appealing to them than, say, that of China."
Surrounded by bigger powers—China, Russia, and Japan—South Korea needs to carve out a global role for itself to "ensure its prosperity and security," says David Straub, a Korea expert at Stanford University. So, in his first year in office, Lee made a point of systematically reaching out to foreign leaders in the United States and other major powers. The following year he headed to Europe. This year, Straub says, Lee is expected to target Africa. At the same time, he is upping South Korea's profile abroad, posting 3,000 volunteers from its version of the Peace Corps to Asia and Africa, where they will focus on public health and childhood education, with plans to increase that number to 20,000 by 2013. Last year South Korea officially became the first former recipient of international aid to graduate to the donor ranks, sending $1 billion to dozens of poor countries, and it plans to triple that sum within five years. Likewise, the number of troops it commits to U.N. peacekeeping operations will jump from 400 in 2009 to 1,000 this year and will work in roughly 10 nations, including Lebanon and Pakistan.
Lee has big plans for Brand South Korea, too. At Hyundai, he turned what had been a small contractor into a global manufacturing powerhouse. He speaks English, unlike his predecessor as president, and he is comfortable playing national pitchman. Just after Christmas, following six rounds of telephone calls with United Arab Emirates President Khalifa bin Zayed Al Nahyan and a last-minute visit to the country, Lee helped South Korea beat out a French and a joint U.S.-Japan consortium to win its biggest foreign contract ever: a $40 billion nuclear-power-plant contract in the U.A.E. While Hyundai and Samsung have overcome the perception abroad that "made in South Korea" still means poorly made, many other South Korean brands have not. According to a survey by Simon Anholt, a British expert on national branding, the country ranks 33rd in global branding power, although its economic size ranks 13th in the world. What's more, more than half of U.S. college students believe Hyundai and Samsung are Japanese brands. "Our job is to narrow the perception gap between the national and corporate brands," says Euh, the head of the branding committee.
Lee plans to build on that success at the G20 summit. He has already distinguished himself from his predecessors by embracing foreign investment and free trade, rather than focusing on rigid ideology, and he intends to use the meeting to showcase the rewards of that strategy. Lee's hope is that he can send a message to smaller, poorer countries, particularly in Asia, that South Korea's less insular, more global approach can be a model they can follow, too. Of course, as his opponents are quick to point out, the fate of his country will not change because the leaders of 20 advanced nations get together for a few days. But Lee says it is part of a larger effort to move his country "away from the periphery of Asia," as he put it recently, "and into the center of the world."