Indo-Sino conflict in context of S. Korea’s problems

 China recently blocked Indian websites and e-commerce platforms in retaliation for India’s move to ban 59 Chinese apps and prevent Chinese companies from participating in infrastructure projects.

It is laughable, given that Facebook, Google and LinkedIn have been blocked in the mainland for years -- my friends there throw their hands up in exasperation as they have to only use local social media platforms -- and the country is now also blocking virtual private networks.

The Cold War between the “Dragon” and the “Elephant” will last long, as China thinks India is moving closer to the US in geopolitical terms.

The latest standoff was sparked by a clash between soldiers in the northernmost Indian territory of Ladakh. Twenty Indian soldiers died, but as usual the Chinese haven’t revealed how many of their soldiers died -- unverifiable accounts say 40.

China is adept at turning up geopolitical tensions against neighbors -- including South Korea -- to divert “nationalist” domestic public opinion when authorities are woefully inadequate in dealing with crises like COVID-19. The Hong Kong National Security Act is the latest such measure.

A recent report by the Korea Economics Institute of America noted, “China’s punitive economic measures against South Korea over THAAD (a US anti-missile system) may have shrouded Beijing-Seoul relations in uncertainty, yet they highlight the economic dependence on China.”

Yes, Korea has been dependent on China for growth as it is a trade-dependent nation and the neighboring country accounts for a huge chunk of exports.

But the communist neighbor has been flexing its muscles to put spokes in the wheels of growth of neighboring countries, many times unreasonably.

According to a recent report of the think tank Asan Forum, by Darren J. Lim, senior lecturer at Australian National University and his doctorate student Victor Ferguson, while the US-China trade war has dominated geoeconomic discussions in 2019, great power rivalry is far from the only domain in which economic instruments are being used in the pursuit of political or strategic objectives.

“The increasing frequency of … Chinese economic coercion (the threat or imposition of economic costs designed to influence others’ behavior) makes the broader study of economic coercion increasingly important for both scholars and policymakers. There remains a need for greater clarity regarding the nature of power and vulnerability generated by economic interdependence, especially in the Chinese context.”

“In this context, the widely reported campaign against Korean economic interests following Seoul’s decision to participate in the United States-led THAAD missile defense program, announced in July 2016, offers a valuable case study.

“The THAAD dispute represents a broad-based coercive episode directed at an ostensibly vulnerable target: China is Korea’s largest trading partner -- the destination of approximately one-quarter of its total merchandise and service exports at the time of the dispute -- and therefore essential to national gross domestic product, 40 percent of which comes from exports. By contrast, South Korea was the source of just 10 percent of Chinese merchandise imports and did not feature among the mainland’s top service suppliers.”

The report notes that over the approximately 18-month dispute, multiple Korean economic sectors experienced varying degrees of disruption.

“The headline victim of economic retaliation was Lotte Group, which at the time relied on the Chinese market for approximately 25 percent of its overseas sales. Lotte was targeted because it was directly implicated in the political dispute, having signed a land swap deal to provide Korea’s Defense Ministry with land needed to install THAAD missile batteries in late February 2017.”

Also, prior to the THAAD dispute, Chinese tourists made up 47 percent of total tourist arrivals and 70-80 percent of duty-free sales. Tourism became the industry most affected by the political tensions.

Hallyu content producers and automakers Hyundai Motor and Kia Motors also faced a severe blow.

Japan is not far behind -- from the Dokdo islets to comfort women issues and forced labor during World War II -- it continues to turn a blind eye to reality.

Since they have been well documented, I won’t repeat the details here.

To up the ante, United States President Donald Trump invited Korea and India along with Australia and Russia to join an expanded meeting of Group of Seven advanced economies later this year. The event is viewed as an attempt by the US to form a broader alliance against China. Korea accepted the invite, much to China’s chagrin

“China’s aggressive stance in the Indo-Sino border conflict, its handling of dissent in Hong Kong and its retaliatory actions against Canada for arresting the Huawei CFO Meng Wanzhou in 2018, will in the medium term hit China where it hurts the most -- its economy,” according to Nandini Vijayaraghavan, head of Research at Korea Development Bank, based in Singapore.

“China was facing its share of macroeconomic challenges even before the COVID-19 outbreak, namely, slowing though still robust GDP growth, high corporate and household indebtedness and the risks posed by its sizable shadow banking sector. Rightly or wrongly, the country now faces reputation risks on account of perceptions of willfully delaying the reporting of the COVID-19 outbreak.”

She noted that now that India and China have banned each other’s apps, the proxy war between the two nations has progressed to a second round. The Indian food delivery startup Zomato has reportedly not been able to access around $100 million funding from Ant Financial. The development is a Pyrrhic victory for all parties.

“It is in China’s self-interest to rethink its foreign policy and communications strategy.”

Meanwhile, authors Li Lin and Leng Hongtao, of the school of Marxism studies at Dalian Ocean University in Dalian, China, note that “soft power theory, coined by Joseph Nye, is supplement and extension of traditional hard power ideology, and a return to classical realism, as well as a criticism about the fact that neorealism relies overwhelmingly on hard power.”

Joseph Nye proposes that “soft power is a kind of ability which can realize the goal through attraction instead of the violence or the temptation. The attractiveness arises from a country’s culture, political ideals and foreign policies. When the policy is seen as legitimate in the eyes of others, the soft power is enhanced.”

Korea is doing that with Hallyu. India needs to do that with Bollywood and other aspects of culture, like yoga.

I am not sure how the standoff between two nuclear powers with the two largest populations in the world and growing economies will pan out.

Hold your breath, with face masks on.

Read more »

Korean Air, Asiana face turbulent tailwinds

 South Korea’s main flagship air carriers appear to be facing strong headwinds at the same time and it is worrisome.

Korean Air and Asiana Airlines are embroiled in their own difficulties, and it is all connected to the typical family-owned conglomerate management system that is so prevalent here.

While there have been calls for chaebol reform over the past years I have been here -- starting with Roh Moo-hyun administration -- there have been no drastic changes so far.

I have always admired Roh, and think he genuinely tried to reform chaebol governance and the prevalent system -- but even he was not successful and got bogged down by the entrenched system.

That aside, I am referring to the problems faced by Hanjin Group and Kumho Asiana. Their problems are different, but not completely. It all boils down to how the chaebol -- family-owned “kingdoms” operate here.

The unexpected passing away of Hanjin Group Chairman Cho Yang-ho, came as a real shock here. It came weeks after he was ousted from the board of directors of the group that controls Korea’s flagship air carrier Korean Air.

Cho, 70, who had served as the airline’s CEO since 1999, died in the United States on April 7, where he had been receiving medical treatment for a chronic lung disease -- all hush-hush till he died.

If you talk of transparent corporate governance, it should have been made public that he was sick -- after all it is a listed firm. But don’t expect such corporate transparency here, not yet.

His only son and Korean Air President Cho Won-tae is now set to take control.

Hanjin, Korea’s 14th-biggest conglomerate by assets, including its affiliates Korean Air, as budget carrier Jin Air, Hanjin KAL and several other logistics companies face an uncertain future now.

The Cho family has been struggling with a string of controversies, especially regarding the high-handed behavior of the patriarch’s two daughters and his wife.

His removal from the board was the first time a founding family member of any chaebol had been forced out of a key post by shareholders. It is a good start.

He was on trial after he was indicted last year on multiple charges that include embezzlement and tax evasion. But that is nothing, chaebol owners here have been let off on far more serious charges after presidential pardons.

His death is expected to speed up changes to the ownership structure of Hanjin Group as a whole, with his son likely to take the reins of the group’s management. Of course given the inheritance taxes the family has to pay it could delay the process … till they figure out the “legal” loopholes.

According to news reports the group has adopted an emergency management arrangement that will leave the chairmanship vacant for now and entrust decisions to a collective leadership made up of several top executives.

As regards Kumho Asiana, which owns Asiana Airlines, it is also complicated.

Reeling under humongous debt and pressure from creditors, the group’s board decided this month to sell the air carrier, a day after main creditors rejected its latest self-rescue proposal.

“For normalization of Asiana, we considered the best option and decided that its sell-off will recover trust in the group and the airline,” it said in a statement.

“The sale of Asiana -- with a 31-year history -- is also for the sake of the future development of the company, as well as for some 10,000 employees,” it said, adding that the group would proceed with the sale process.

This follows a “qualified opinion” issued by Asiana’s auditor Samil PwC.

Samil suggested that “the company might have provided limited financial information.”

It disagreed with Asiana on how much the airline allowed liabilities for operating-leased aircraft repair and earnings from mileage.

While airlines across the world have faced similar situations for decades, it is really sad that the top air carriers in Korea are in trouble.

For example, 24 airlines in the US have filed for bankruptcy under Chapter 7 since the early 1980s, while 60 have filed for bankruptcy under Chapter 11.

Chapter 7 bankruptcy is a legal process that can help individuals get relief from debts by discharging -- or clearing -- some or all of what’s owed. Chapter 11 is a form of bankruptcy that involves a reorganization of a debtor’s business affairs, debts and assets.

Meanwhile, SK and Hanwha groups have been mentioned as potential buyers of Asiana, but they are also family-controlled, so I don’t see how the ground situation will change.

With low jet fuel prices now, one would have expected Korea’s top air carriers to rake in profits, so it certainly means there was something wrong with their management.

It all boils down to the chaebol culture. The “family” reigns supreme and they do whatever they want without bothering about other stakeholders.

That is why it is good that the National Pension Service which has substantial stakes in chaebol firms is now strengthening its stewardship code. Hopefully, politicians with a vested interest won’t put pressure to derail it.

Of course some blue chip firms will continue to thrive with their skullduggery. There are many which I won’t name.

It is also good that activist shareholders -- not just overseas investors, but even Korean firms -- are not keeping quiet and demanding changes to the way the chaebol operate.

There is still a long way to go, but finally things are moving -- 15 years after I first landed in Korea.

Read more »

Is Korea’s launch of world’s 1st 5G services hype?

 The next-generation wireless network technology 5G is in the limelight as South Korea is poised to beat the United States as the first to cross the finish line.

Tech giant Samsung Electronics has said it will launch its Galaxy S10 5G device in collaboration with the nation’s largest telecom operator SK Telecom on Friday, beating US telco Verizon, which is scheduled to launch its fifth-generation services across the country on April 11.

But how exactly will 5G telecom services benefit consumers? Why this rush to be the world’s first?

It will make no material difference if services are below par, and going by the palli-palli (fast-fast) Korean culture, I am sure many Samsung and SKT executives are trembling to launch services by the given deadline. Remember the Galaxy Note 7 fire fiasco when they did not look before they leaped?

According to a recent report by MarketWatch, the 5G penetration rate in Korea will be 5 percent by 2020, and subscribers will increase from 30 percent in 2020 to 90 percent in 2026.

“The 5G hype across the world has led Korea to invest $1.7 billion to roll out 5G wireless services that would enable users to download a full movie within a second. This would enable the related industries to upsell new 5G related devices and infrastructure equipment, and earn revenue worth $350 million by 2026. This will help in the expansion of the telecom infrastructure equipment industry,” the report noted.

The major growth factors driving the 5G market are continuous evolution toward enhanced bandwidth, lower latency, enhanced security and openness of mobile networks.

However, the region faces growth challenges, such as regulatory pressures. For instance, the Korean government is forcing SKT, the dominant mobile carrier, to lower the rates that it is proposing to recoup its investments.

Another report by the International Telecommunication Union noted that expectations of 5G are high, with many assuming it will deliver a “transformative promised land.”

“As long as the investment case for 5G remains uncertain, industry and policymakers should remain cautious and should consider enhancing the availability and quality of existing 4G networks in the run up to 5G,” said the report.

But the Korean telcos and government want to be the first to launch 5G services -- an obvious case of ego issues.

I will be the first to applaud if Korea -- my home since 2004 -- gets that distinction but caution is needed.

Do consumers really need this hyped-up costly service now, without adequate field tests and knowing how they will really benefit? The current Long Term Evolution 4G services are very comfortable.

The 5G services won’t be available in every country at the same time. Estimates say that by 2023, up to 32 percent of North American mobile connections will be on a 5G network. Central American countries will most likely see a slow 5G rollout. Asia is far behind.

Korea’s push to be the world’s first is understandable in this context. But I personally think it is taking the palli-palli culture to the next level.

There is no need to commercialize a next-generation service and fool consumers to pay for something that will bring no immediate material benefits. It may actually benefit customers one year down the road -- not now.

To understand the logic behind their rush, I tried contacting the three telcos in Korea -- KT, SKT and LG Uplus -- which operate mobile services here.

KT, which tested its 5G services during the 2018 PyeongChang Winter Olympics, responded.

The firm, which has massive telecom infrastructure here that actually made Korea an ICT powerhouse before it was overtaken by SKT, has invested heavily to build the next-generation network that will allow customers to experience faster and more secure services.

“We are preparing B2C (business-to-consumer) 5G plans and services to deliver the maximum benefits of 5G to the general public. KT plans to introduce specialized apps and connected devices (neckband cameras and GiGA Live TV, etc.) with the launch of the full-scale 5G commercialization,” a spokesperson noted.

KT is especially focusing on what people enjoy the most with their mobile phones, such as making calls, playing games and watching videos, so that they can better experience what true 5G is.

“We are also developing various use cases in the B2B (business-to-business) areas, such as smart factories, smart cities and connected cars, by utilizing 5G’s ultra-low latency and massive connectivity,” he noted.

KT believes that it can pursue a good balance between providing world-class 5G services and making sustainable investments by optimizing the deployment of its 5G network and cooperating with global partners to develop and upgrade 5G technologies.

The company is working on introducing data plans that are appropriate for 5G customers by analyzing their needs and data usage.

It launched its commercial 5G network in December last year following the government’s 5G spectrum auction. Since then, KT has successfully demonstrated various 5G services, such as robot guides and baristas as well as real-time broadcasting.

“Considering the time it usually takes for developing and making new apps or special devices, Korea is likely about a year ahead of the competition. Overseas, many 5G services are still in initial development,” the spokesperson noted.

KT has the upper hand for now. In collaboration with Samsung, it has already installed the largest number of 5G base stations across the country.

It is true that local telcos are investing heavily. But how will Korean citizens benefit? Higher download speeds are just a marketing point for now to rake in more revenue. It is still early days for the 5G ecosystem to flourish. I would prefer to wait one year before I make the shift from LTE.

I agree that 5G will not only enable faster connections, but will provide improved bandwidth. The benefits will spread further than just smartphones. The technology will cover the internet of things and will act as a catalyst for a wide range of new consumer and enterprise experiences, including both data intensive and energy efficient applications. But not now.

Juniper Research forecasts a healthy adoption of 5G services, with revenues set to exceed $65 billion by 2025 globally. It might be a few years away, but the potential improvements a 5G network can provide are enough to get tech-savvy Korean consumers very excited.

I am proud that Korea is the first country to commercialize 5G services, but will not fall into the trap telcos have set for customers. I will wait and watch. Why pay more for a service when the present LTE 4G network is efficient and satisfies my needs?

Read more »

S. Korea-India economic ties need more heft

 It is now nine years since the South Korea-India Comprehensive Economic Partnership Agreement -- a de facto free trade agreement -- went into effect. However, while much progress has been made, there is still a long way to go for economic ties to reach their potential.

It was widely anticipated that the CEPA, which came into effect in January 2010, would lead to more bilateral trade and investments. South Korea abolished tariffs on 93 percent of Indian imports and India has done the same on 75 percent of Korean imports. 

Besides, the agreement sought to increase the interactive trade account, as it includes investments in various sectors like goods, services and even intellectual property.

They have since set a target to increase bilateral trade to $50 billion by 2030 from around $25 billion last year.

While bilateral trade has no doubt improved, it is still way below expectations.

It is true that large South Korean brands are household names in India and their strength has grown in the years since they began operations there. However, foreign direct investment inflows have been growing at a tardy pace.

The India-South Korea CEPA has certainly helped, according to Rishi Ramachandran, an Indian entrepreneur and CEO of Group IBI, an Asia-focused business intelligence and market development consultancy.

He has lived in Seoul for more than two decades, during which he has followed the evolution of trade ties between both countries and advised organizations on CEPA in particular.

“Rather than an agreement, I would term it a useful mechanism for fostering trade between South Korea and India and for easing trade barriers and tariffs in the long run,” he told The Korea Herald, adding that both sides are trying to access sectors in which they can be competitive.

“But these are subject to progressive easing of both tariff and nontariff barriers. For example, in a sector like pharmaceuticals, both South Korea and India have successful manufacturers of generic drugs, and for whom countries in Africa, Southeast Asia and Central Asia are key target markets. However, the best Indian drug companies can hope for is supplying APIs (active pharmaceutical ingredients) to the Korean pharma sector, as opposed to supplying finished formulations.”

But even then, successful cases are rare and the scope is highly limited since the pharma industry is highly regulated in South Korea with significant nontariff barriers. On the other hand, India could export more food products and consumer products in areas such as coffee, tropical fruits, leather goods and fashion accessories for which there is plenty of demand, he said.

As key economic partners, Ramachandran noted that trade relations are continually improving. However, what India needs is a significant boost in the promotion of Indian brands in South Korea.

“The ‘Made in India’ moniker still has questionable quality and packaging issues attached to it. India needs to address this as a priority and promote well-established brands in South Korea,” he said.

“India needs to realize that South Korea (and most other Asian geographies) is highly brand- and image-conscious. Therefore, Indian products sold here not only have to be of impeccable quality -- as they are competing against domestic products as well as products from overseas -- but they also need to be packaged well, presented well and marketed well.”

As a case in point he noted Indian mango shipments, which are renowned the world over but can hardly be seen at retail outlets here today, contrary to their sudden surge here in late 2016.

Rather than a single bottleneck, there are two main factors hindering growth of mango exports to South Korea, he said.

One is tariffs since, just like CEPA, South Korea also has a free trade agreement with the Association of Southeast Asian Nations as well as the Regional Comprehensive Economic Partnership that benefit exports from the Philippines and other regional countries.

While CEPA entails gradual scaling down of tariffs on Indian products from 30 percent to zero percent over eight years, the tariff targets with ASEAN are far more aggressive and trade-friendly.

Also, when compared to the Philippines, Vietnam or other Asian countries that sell mangoes in South Korea, India does not have a visible dedicated entity on the ground in Seoul promoting mangoes and Indian agricultural exports.

“A dedicated entity can ensure not just maximization of tariff benefits, but more importantly ensuring maximum front-end promotion in South Korea, i.e. customization in terms of product quality, packaging and selling to the right channels.”

The Agriculture and Processed Foods Export Development Authority of India organizes seminars and promotional events at trade fairs where importers can inquire and place orders. If there was a dedicated team here for promotion year-round, the products could go to the right retail channels. As an example, what Australia does with meat and livestock for promotion in international markets is a good benchmark, he said.

As regards economic areas, Ramachandran noted that the country is already benefiting significantly not just through exports to India, but also through large-scale investments that Korean conglomerates and their supply chain partners have made, be it Hyundai Motor, Samsung Electronics, LG Electronics or Lotte Group.

“India is therefore not only a huge captive market for South Korean consumer goods and cars, but also a huge low-cost manufacturing base for Korean exports to other countries. And it will continue to increase as all of these companies scale up their production, or add new facilities, like the world’s largest mobile phone factory for Samsung that was inaugurated in Noida (near New Delhi) during President Moon Jae-in’s visit to India last year.”

Indian Prime Minister Narendra Modi’s recent visit to Seoul, he said, should by default lead to better ties “That said, this visit by Modi was a short one and ostensibly did not include a business delegation from India. So while headline issues and geopolitical climate in the region may have been discussed, in terms of economic ties, this was at best a follow-on to the platform laid by President Moon’s high-profile visit to India in July 2018.”

Read more »

India’s demonetization and Korea’s currency reform

India’s Prime Minister Narendra Modi stunned the nation when he made a public announcement at 8 p.m. on Nov. 8 that 86 percent of the currency in circulation -- 500-rupee (US$7.40) and 1,000-rupee notes -- would no longer be legal tender at the stroke of midnight.
The ostensible reason for this was to fight rampant corruption and the underground economy along with counterfeit notes printed by Pakistan to fuel terrorism in India.
He asked the Indian citizens to bear the short-term inconvenience for long-term benefits that would accrue to the economy. While the public has by-and-large supported the move, the anti-Modi cottage industry and opposition politicians have been very critical.
Sure, the public has been inconvenienced because the central bank did not ensure that adequate replacement currency was supplied to commercial banks and the ATM’s were fully stocked across the length and breadth of the country. As a result, there have been long queues of people waiting to exchange their invalid currency and withdraw lower-denomination notes for daily expenses. India’s massive cash-dependent informal sector has been hit hard, and there are even reports of people dying in queues.
However, the public has still not lost patience as Modi has pleaded for time until Dec. 30 for things to get back to normal. The common citizens are willing to give him the benefit of doubt, although his rivals do not.
The jury is still out on whether the move will bring economic benefits to Asia’s third-largest economy or prove to be a huge blunder that could see Modi out of power in 2019, when the parliamentary elections are due next.
That aside, I see in this an opportunity for the Korean authorities to draw lessons from India’s demonetization exercise and see how they can effectively implement the long overdue currency reforms to tackle the underground economy here.
The size of Korea’s underground economy is estimated at 161 trillion won ($143.62 billion) a year. A recent study by Kim Jong-hee, professor of Chonbuk National University, showed that it is equivalent to 10 percent of the nation’s gross domestic product, much higher than the Organization for Economic Cooperation and Development average -- 6.65 percent of G-7 countries as well as 7.66 percent for the other member states.
The amount of tax evasion stood at an annual average of 55 trillion won in the last 20 years, 3.72 percent of the GDP.
“Underground economic activities induce tax dodging, leading to fiscal deficits and tax hikes for key economic actors to make up for the uncollected taxes,” Kim said in the report.
In Korea, it is common for corporates to set up slush funds to bribe politicians, as evident from the frequent raids by prosecutors, which are obviously held in cash of large denomination notes and not in banks. For that reason, there have been many calls to scrap the biggest note, 50,000 won, something that the Bank of Korea is wary of.
In my opinion, Korea should also go in for the bold move of demonetizing the 50,000-won note without notice, so people do not have a chance to convert their illegal currency -- as they will be forced to deposit it in banks and account for it -- and then go in for redenomination of the currency.
This is where the Indian experience will prove handy.
The ground situation in Korea is different and many of the problems India is facing now will not affect the country. Especially since the banking network is more widely used and people are more financially savvy.
For instance, unlike India which is a cash-dependent country, Koreans are increasingly favoring cashless transactions.
According to a central bank survey, Koreans carry on average 1.91 credit cards, 2.03 mobile cards and 1.26 check or debit cards. Four out of 10 picked credit cards as the means of payment they use most, up from three out of 10 the previous year. The ratio of those picking cash, meanwhile, continues to fall.
As Koreans are carrying less cash, with the average standing at 74,000 won last year, down 3,000 won from the previous year, the central bank is also issuing less cash. It released 12.3 percent fewer 10,000-won banknotes last year from the previous year, while the issuance of 5,000 won notes dipped 5.9 percent and 1,000 won bills 3.7 percent.
Statistics from the BOK show that credit cards, at 39.7 percent, make up the largest share of consumer transaction activity while cash accounted for 36 percent in 2015. There is also the increasing popularity of mobile payments, something that is negligible in India.
It would be prudent for the Korean policymakers to watch the Indian experience closely and flush out the problems.
Once the demonetization exercise is successfully completed, it should roll out the redenomination exercise.
Redenomination is the process of lowering the face value of a currency while preserving the same real value. It is simply moving decimal points, so a 1,000-won note will be redenominated as 1 won.
Since South Korea issued banknotes of 1,000 won and 5,000 won in the 1970s, there has been no redenomination to abbreviate the unit of the currency. The 50,000-won bill only made its debut in 2009 in the wake of the rapidly falling value of the 10,000-won bill.
Korea has redenominated twice since the Korean War. In 1953, when the hwan was introduced, with 1 hwan equal to 100 won. In 1962, the won was reinstated, with 1 won equal to 10 hwan.
The BOK claims it has carried out no task on a currency redenomination since 2004 when the government decided to put off discussions on the issue. Finance Minister Yoo Il-ho also recently said that the government has no plans for a redenomination, noting it could cause great confusion.
It is true that a redenomination can cause public inconvenience in the process of adjusting to new bills and a possible hike in consumer prices and spread psychological anxiety among economic players.
Deciding to redenominate during an economic downturn signals that an economy is in very serious trouble and likely to face a currency crisis. It can lower a nation’s international credibility and prompt outflow of foreign capital.
It can also cause prices to become unstable. Redenomination is usually adopted during high inflation and political insecurity (something that Korea is currently facing). Under such circumstances, preference for hard assets rise, pushing up prices for real estate and gold. Such appreciation of hard asset prices can put inflationary pressure.
Moreover, issuing and circulating new coins and paper currency is costly. Financial institutions need to replace their existing payment systems and ATM machines, which requires huge expenditure.
According to some experts, redenomination can drive illegal money into the underground economy because information about personal wealth can be revealed during the process of exchanging old currency with the new one. This is invalid if demonetization takes place.
That is a sure way to tackle the underground economy and boost the currency. It of course requires political will and a strong leader like Modi.

Read more »

Samsung's Note 7 fiasco and perils of 'ppalli-ppalli' culture

First published in The Korea Herald.

The last few weeks have been tumultuous for tech giant Samsung Electronics, as it has been knocked down by the battery explosions of its latest flagship smartphone Galaxy Note 7 across the globe.

Samsung recalled 2.5 million Note 7 smartphones in September 2016 after a number of the units spontaneously burst into flames. Faulty batteries were blamed at first, and it issued replacement phones it claimed were safe. However, some of the new phones suffered the same problem, and the firm asked consumers to switch off their Note 7s on Oct. 11. All production and sales of Note 7 handsets has now been stopped, and the model has been withdrawn from the market.

South Korea’s No. 1 conglomerate is still struggling to recover, having initially regained composure and immediately ordered a global recall only to stumble and fall when the replacement handsets also overheated and exploded.

After numerous cases of exploding batteries and a botched replacement program, with sales now discontinued worldwide, some analysts predict the Note brand is finished for good and will be given a quiet burial.

It is a pity, because the Note was truly a game changer and this year’s model got the best reviews the product line had ever seen.

When it was first launched in 2011, many mocked its large screen size, with Wired even lamenting that its “comically huge” 5.3-inch screen made the device too big for pockets and thumbs alike. But ultimately, its popularity meant that even archrival Apple was forced to follow suit.

Another feature that was ridiculed was the stylus, which also has been imitated by competitors. The fourth edition was the first smartphone to be tailored for virtual reality -- that too is being aped by others now.

It won’t be an understatement to say this is an unprecedented crisis that will haunt the group for a long time to come.

Samsung has now lowered its operating profit estimate for the third quarter to 5.2 trillion won ($4.6 billion) from the original estimate of 7.8 trillion won. It also lowered its expected revenue to 47 trillion won from 49 trillion won.

Most analysts have pegged the cost of the Galaxy Note 7 fiasco at about $4 billion, including recall expenses and lost sales, with the mobile division even expected to report an operating loss.

As Fitch Ratings has noted, potential long-term brand damage from the recall and production suspension of the Note 7 is a greater threat to its credit profile than the direct financial impact, which will be buffered by ample liquidity and a strong balance sheet.

“Fitch believes that the benefits of Samsung Electronics’ diversified product portfolio have reduced its vulnerability to this shock. ... However, the problems with the Note 7 have raised long-term uncertainty about its handset operations, as the issues with the flagship model have highlighted weaknesses both in R&D capabilities and the company’s capacity to efficiently remedy serious hardware defects.”

The ratings agency then went on to add that industry experience, such as the decline of Nokia and BlackBerry, shows how successful manufacturers can lose market share particularly quickly in the handset business. This is due to the fast pace of technological change and the frequency with which many consumers change their handsets.

These are indeed tough times for Samsung, but I think it will not be long before it overcomes it, given the tenacity of Koreans.

On that note, I should also add that the crisis that Samsung faces now can be linked to the unique “ppalli-palli” culture in the country.

The Korean term means “fast; quickly; hurry up” in English. Every single economic achievement the nation has reached to this day is linked to this culture. Koreans do everything as quickly as possible with dedication to achieving the set goals as soon as possible. As a result, it has become the main work ethic that is understood by all employees and strictly enforced by bosses.

For that matter, ppalli-ppalli is so ingrained in Koreans that mothers don’t tell their children “come along.” They say “ppalli-ppalli wa,” or “come quickly.” My Korean friends and even wife do the same to me!

I worked in the European Union business lobby in the country for close to eight years during my 12-year stay here and have come face-to-face with this culture numerous times. Although a foreign organization in name, it used to be run as a typical domestic company since the chief operating officer was Korean. While this culture makes employees put in long work hours, it does not really enhance productivity.

Most Korean companies want things to be done as quickly as possible without due checks and balances. Meeting the deadline is more important than doing a perfect job.

Although Samsung heir apparent Vice Chairman Lee Jae-yong is trying to totally transform the work culture at his group, it can be successful only if those lower down adhere to the changes. Which, I believe, is not the case.

This is evident from the fact that the botched recall raises questions about how carefully Samsung researched safety issues around the original Note 7, as well as the replacement.

Samsung has often challenged itself by cramming sophisticated components into a new device in time to beat the launch of the latest iPhone. This time, it advanced the launch of the Note 7 to a month before the launch of iPhone 7 to gain an advantage.

It is reasonable to assume that everyone from the tech engineers, designers and suppliers were told to strictly adhere to the deadline ppalli-ppalli, and somewhere down the line appropriate safety checks were ignored or glossed over.

Moreover, faced with trouble when the first batch of recalls took place, it should have taken the time to analyze the mistake, but wanted to get back in the game ppalli-ppalli. It found a quick fix -- blaming the overheating on a batch of Samsung SDI batteries -- and deployed it with characteristic speed and efficiency. Unfortunately, the diagnosis was wrong.

It seems highly likely that Samsung’s ppalli-ppalli efforts to pack ever more power in these sleek devices may have contributed to the Note 7’s tendency to overheat and even explode by cramming a high-capacity battery into too small a space.

Typically, lithium-ion batteries have been relatively safe, but as batteries grow ever denser, that leaves an ever thinner margin for error in design and manufacturing. Being ppalli-ppalli in evaluating their performance is a definite no-no -- something the Samsung executives behind the project did not comprehend.

Hopefully, it will be a lesson for the company and it will bounce back ppalli-ppalli.

Read more »

Government role in corporate debt restructuring

First published in The Korea Herald.


The hot topic in Korean corporate circles today is undoubtedly the moves by the government and state-run policy banks to bail out the ailing shipbuilding and shipping companies.

Given the importance of these sectors in Korea and their prolonged financial distress, it is understandable that the government has pushed the panic button. The process of bailing them out has been set in motion with some sort of consensus reached between the Finance Ministry and Bank of Korea.

BOK Gov. Lee Ju-yeol has cautioned against the central bank mobilizing its power to print money in the ongoing corporate restructuring. He was echoing the sentiments of critics, who have raised worries over the government’s possible misuse of the money-issuing authority.

The current crisis in the shipping and shipbuilding industries is very much evident. Once regarded as the backbone of Korea’s economic growth and job creation, they have been reeling from mounting losses caused by an industry-wide slump and increased costs.

Hanjin Shipping and Hyundai Merchant Marine -- the major South Korean shipping companies -- face trouble with mounting losses and have applied for creditor-led debt restructuring.

The top three shipbuilders have also failed to clinch a single deal in April, according to latest data.

They only managed to win five construction deals over the first four months of this year, which is only around 5 percent of the average amount posted in previous years.

Daewoo Shipbuilding & Marine Engineering and Hyundai Heavy Industries, failed to win any deals in April. Samsung Heavy Industries has not earned any orders this year for the first time.

Given this dismal situation, it is important to ask: Is active government involvement in corporate debt restructuring really advisable?

No doubt, corporate debt restructuring is an important step toward recovery. But what are the limits to which the government should stick to without putting a burden on other sectors and more importantly tax payers?

Given the interlinkages between corporate debt problems on one hand and the recovery of the financial system and overall economy on the other hand, several governments across the world in the past have introduced measures to help facilitate the process of corporate debt resolution.

However, there are a number of complications involved.

Corporate debt problems have often created real risks of disruption of activity as companies have difficulties meeting their working capital needs to secure production. This in some cases led to weaker capacity to service existing debt and further deteriorated their balance sheet.

The slowdown of activity has contributed to unemployment and the nonperforming loans have endangered the already weakened banking system and further reduce the ability of banks to extend credit, slowing down the recovery.

As experts have noted, debt overhang becomes self-perpetuating as corporations are unable to deleverage by retaining earning or issuing equity because of recession, but recession is also being prolonged by the high level of debt.

The government’s rescue efforts of embattled corporates typically entail direct fiscal costs and may have increased the contingent risk in the future due to moral hazard. The resolution of corporate debt problems thus became an important part of the recovery strategies across a range of countries affected by the crisis.

A past IMF Working Paper, “Government Involvement in Corporate Debt Restructuring: Case Studies from the Great Recession” is worth noting here, and should be mandatory reading for Korea’s Finance Ministry officials at this time.

The paper surveys corporate debt restructuring episodes in Latvia, Russia, Spain, UAE, Ukraine, and the United States and provides a comparison of modalities of government.

It notes that in cases in which the number of troubled corporations is small, their potential macroeconomic importance is limited and the financial system is sound, the rationale for government’s involvement in corporate debt workouts is weak.

“In contrast, when corporate debt problems are widespread, with potentially sizable macroeconomic consequences, and market failures inhibit debt workouts on the required scale, a comprehensive approach involving government could be warranted. In these cases, however, the framework of such involvement needs to be carefully defined.”

That choice typically involves weighing the costs of intervention against the need for a speedy restructuring. The costs are not limited to the direct financial ones, and include indirect economic costs that could eventually appear from both action and inaction of the government.

Governments’ specific role in an effective corporate debt restructuring process typically includes provision of: appropriate legal foundations; mediation and incentives for out-of-court resolutions; direct financing; and facilitation of restructuring.

Large-scale debt workouts may require an overhaul of the legal framework and corresponding enforcement mechanisms.

Direct government financial assistance to facilitate debt restructuring is generally observed in cases in which debt problems are pervasive and impose negative externalities on the economy.

The incentives may include compensation to creditors for lengthening maturities or providing guarantees for corporate loans. Sometimes, such support also includes direct lending to companies that are viable but are unable to access markets on their own.

In addition to direct assistance to corporations, governments may provide indirect support to the corporate sector via assistance with bank recapitalization and liquidity provision.

This approach is being tried in Korea now.

The IMF paper notes that country experiences with wide-scale corporate debt restructuring in the past have been mixed and have involved lengthy and difficult processes.

“While outcomes varied by country, the past experience indicates that a properly designed strategy would generally make the best use of limited fiscal resources, target interventions where needed most, leverage market-based solutions and private resources, bolster credit enforcement and insolvency laws, and preserve credit culture.”

Tailoring a corporate debt restructuring strategy to individual country circumstances is a complex process involving attention to a number of key factors -- including policy coordination, analysis of data to assess the dimensions of the debt problem, reform of the legal and institutional framework for enforcement of credit, particularly the corporate insolvency law, identifying the rationale for government financing and coordination with financial sector restructuring, particularly with respect to banks.

“The direct financial costs of government interventions varied significantly across countries. While the fiscal and contingent costs in corporate debt restructuring episodes are somewhat smaller compared to the costs of financial sector support, they ranged from zero (where no fiscal resources were deployed) to 10 percent of GDP,” the IMF study notes

“However, it should be noted that contingent risks built up in the years before the crisis due to corporate sector debt have in some cases already translated into fiscal costs.”

In what should be positive for the Korean government at this stage, in general, the debt restructuring and related measures have helped avoid large-scale corporate insolvencies in the sample countries. These measures provided confidence to the markets and stabilized expectations.

However, they also came at a direct and indirect cost to the taxpayer. These interventions weakened the governments’ balance sheets as they accepted assets of questionable financial value in exchange for new resources that had ample alternative use in crisis times.

That is something that the Korean policymakers will have to monitor and work out as they race to bailout the ailing firms.

Read more »

Amending retail price maintenance rules

First published in The Korea Herald.

The Korea Fair Trade Commission is all set to take a decision on amending the “Guidelines for Review of Resale Price Maintenance” as the public comment period has just concluded.

Resale price maintenance, or RPM, is a system in which the manufacturing firm determines and enforces the price at which distributors resell its products. Hence, it is also known as vertical price-fixing, price protection, or the practice of imposed prices.

Until now, RPM has been deemed illegal in Korea, and companies that are caught engaging in this practice are fined heavily by the antitrust agency because it is considered anticompetitive.

The proposed amendments will allow RPM under certain conditions, more specifically if it “enhances consumer welfare.” It will still be generally illegal; firms need to prove that it does indeed help consumers if they want to get permission for the practice.

The FTC guidelines prescribe specific review criteria for the enforcement of Article 29 (1) of the Monopoly Regulation and Fair Trade Act on resale price maintenance, or RPM. For this purpose, it received public comments for about three weeks from May 23 to June 13.

The current guidelines treat minimum RPM as illegal per se regardless of whether there are justifiable reasons for using it, such as consumer welfare enhancement.

“The proposals state that the minimum RPM is highly likely to be deemed illegal as a matter of principle. However, when the consumer welfare enhancing effect of the minimum RPM concerned outweighs its anticompetitive effect, the minimum RPM can be permitted as an exception,” the agency has noted.

“The burden of proving reasons to justify the minimum RPM, such as consumer welfare enhancing effect, is on the (concerned) enterprise.”

Following the FTC’s move, there are some questions that need to be asked: Should RPM continue to remain illegal? And what will be the impact of the proposed amendments?

For many years, until antitrust agencies across the world struck it down, RPM used to be a common practice for manufacturers to set a minimum price for retailers to sell their goods. It ensured a minimum price of resale and avoided price competition.

Globally, public policy toward RPM has taken various forms.

It has been prohibited in Canada since 1951 as a restrictive practice against the public interest. In the United States resale price maintenance is authorized in some but not all the states, and also in interstate commerce between “fair-trade” states. In Sweden the practice has been prohibited since 1953. In the United Kingdom legislation introduced in 1964 prohibits RPM, except for classes of goods specifically exempted by a special court.

There are quite a few criticisms of RPM, which led it to being termed illegal.

It is argued that the system artificially inflates prices. Consumers lose out as they have less discretionary income to spend on other goods. Moreover, it is also allocatively inefficient as the price is likely to be above marginal cost.

By setting high prices, manufacturers will have no incentive to remain internationally competitive. RPM enables an easy profit margin in domestic markets, but the result is that inefficient manufacturers may stay in business and lose the market incentive to cut costs and become more efficient.

It also seems out of place today when the culture of shopping around on the Internet for the cheapest products is so widespread.

The likelihood of collusion is high, particularly in a market gravitating toward either manufacturers or retailers. By making RPM illegal, it prevents the formation of cartels.

On the other hand, the supporters of RPM say that it helps retailers to be more profitable. Manufacturers may also prefer it, because if the retailers are profitable then more of their goods will be sold.

It also prevents price wars among retailers as they will not start undercutting each other.

It has also been argued that RPM provides help for smaller retailers, who cannot buy in bulk, to remain profitable. On the other hand, it enables manufacturers to reward shops who promote their products through advertising. This will help firms invest more in future products.

Consumers benefit because they don’t have to waste time searching around for the best deal. They know the price will be the same regardless of where they buy it.

Moreover, its supporters note that minimum RPM is different from price-fixing by cartels. Classic price-fixing is typically referred to as horizontal price-fixing, as they are arrangements between competitors operating at the same level of distribution. On the other hand, vertical arrangements are those between businesses operating at distinct levels of distribution.

In price-fixing, the initiators are competitors who realize that they will be better off if they minimize group competition. With minimum RPM, a single manufacturer influences downstream retailers’ behavior through an increased markup, so they will compete more aggressively on nonprice dimensions, even as competition among manufacturers is not affected. This enhances intra-brand nonprice competition and overall inter-brand competition.

They note that minimum RPM is a business practice that can benefit companies and consumers in stark contrast to price-fixing conspiracies.

Incidentally, in recent years, there is increasing recognition of the potential competition benefits of RPM arrangements and many antitrust agencies are relaxing the rules to make them more flexible.

In 2007, the United States moved away from the per se prohibition. In December 2014, the Australian Competition and Consumer Commission authorized an RPM agreement for the first time, recognizing that the supplier had limited market power and that the arrangement benefited consumers. The European Union guidelines also state that parties to an RPM agreement have the “possibility to plead an efficiency defense” under certain circumstances. In a number of jurisdictions in the region, RPM agreements are not singled out, but are subject to the same test as other vertical agreements.

South Korea is also now moving in the same direction, and it remains to be seen how flexible the FTC amendments will be.

Read more »

Effectiveness of warnings on cigarette packs

First published in The Korea Herald.

As expected, South Korean tobacco-makers and retailers have expressed their opposition to the Health Ministry’s new antismoking policies, which require all firms to fix health warning illustrations on their cigarette products. However, the ministry is not being swayed by their arguments and has refused to stand down.

The new measures, which will be implemented later this year, require health warnings consisting of text and images to be printed on the top 50 percent of the front panels of all cigarette packets. In addition, retailers have to display the front panel bearing the warning graphics to customers.

The graphics have to show tobacco’s harmful effects as well as health conditions that may be triggered by heavy smoking, including heart disease, lung cancer and possible birth defects.

The tobacco lobby claims the government is interfering with their rights to product design, as almost all cigarette packs will look more or less identical.

Dismissing their arguments, the Health Ministry has said that some 80 countries overseas require cigarette products to have warning illustrations, and of them, 63.8 percent make it mandatory for the warnings to appear in the upper portion of the packs.

From an economic standpoint there are many questions that need to be asked in this tug-of-war.

Have warning graphics discouraged smokers?

Have these policies affected the revenues of tobacco-makers in countries where this policy has been implemented?

What has been the economic impact on tobacco firms?

According to a recent report by the U.S.-based nonprofit organization Campaign for Tobacco-Free Kids, despite the numerous public reports on the risks of smoking, studies show that a large number of smokers have inadequate knowledge of the health effects of smoking.

“While some smokers generally know that tobacco use is harmful, they underestimate the severity and magnitude of the health risks and tend to perceive other smokers to be at greater risk for disease than themselves,” it notes

Knowledge of the health risks of smoking is even lower among people with lower income and fewer years of education because of limited access to information about the hazards of smoking.

Therefore, health warnings on cigarette packs have been found to inform smokers about the health hazards of smoking, encourage smokers to quit and prevent nonsmokers from starting to smoke.

Studies by the International Tobacco Control Policy Evaluation Project, an international cohort study that surveys adult smokers in 19 countries, provides much of the evidence base for health warnings.

According to ITC research, adult and youth smokers report that large, comprehensive warnings reduce smoking consumption, increase motivation to quit and increase the likelihood that they will remain abstinent following an attempt to quit.

It shows graphic warnings are more effective than text-only warnings in leading people to think about quitting and deterring them from having a cigarette.

Further, ITC studies of smokers in Australia, Canada, the United Kingdom and the U.S. revealed that graphic warnings are more effective than text-only warnings at making smokers think about quitting and deterring them from having a cigarette, and that larger, pictorial warnings are associated with increased quit attempts.

Evidence from Canada, the first country to implement graphic warnings, shows that after controlling for price, graphic warnings significantly decreased the odds of being a smoker and significantly increased the odds they would try to quit.

After Singapore introduced their graphic warnings in 2004, 28 percent of smokers surveyed reported smoking fewer cigarettes because of the warnings; 14 percent of the smokers surveyed said that they made it a point to avoid smoking in front of children; 12 percent said that they avoided smoking in front of pregnant women; and 8 percent said that they smoked less at home.

Since Thailand introduced their second set of pictorial labels in 2006, 44 percent of smokers said the warnings made them “a lot” more likely to quit over the next month.

In Brazil, after the introduction of new graphic warnings in 2002, 67 percent of smokers said the new warnings made them want to quit.

Given this, the Korean Health Ministry may be right to conclude that these measures will be effective in South Korea, home to almost 10 million smokers, where an estimated 57,000 die every year due to smoking-related diseases.

According to the World Health Organization, warning labels on tobacco products constitute the most cost-effective tool for educating smokers and nonsmokers alike about the health risks of tobacco use.

“In many countries, more smokers report getting information about the health risks of smoking from warning labels than any other source except television,” it notes.

Countering the claims by tobacco-makers, it says, “For decades, the tobacco industry has taken advantage of the package as a venue for creating positive associations for their product. The use of graphic pictures is an important means of replacing those positive associations with negative associations, which is far more appropriate given the devastating impact of tobacco products on global health.”

All these arguments seem valid, and if true, the tobacco-makers will certainly see a dent in their revenues once the policy is implemented.

However, I am not really convinced that it will lead to a dramatic fall in the number of smokers in Korea.

In 2014, the National Assembly approved an 80 percent increase in the price of cigarettes, from 2,500 won ($2.17) per pack to 4,500 won, in an effort to curb smoking. The new bill took effect on Jan. 1, 2015.

While in the initial few months, there was a decline in the revenue of tobacco-makers here -- as many smokers started experimenting with e-cigarettes -- it was short-lived, and the revenues have again increased a year later. The only beneficiary has been the government, whose tax kitty has swelled.

As noted by Maastricht University researchers in a recent article in Health Psychology Review, “Scary graphic warning labels are a popular tool among policymakers, but there is no clear consensus within the scientific community regarding their efficacy.”

The researchers looked at an initial selection of 295 publications exploring “fear appeals,” including graphic warning labels, then eliminated studies that had methodological problems.

“Not only is there little evidence that could support the use of graphic warning labels, but if you combine the evidence that is available, it turns out that at best, the use of graphic warning labels only has a small effect, while in the worst case, it may even backfire,” they noted.

It remains to be seen how the policy pans out in South Korea -- with a tobacco market widely perceived to be  demand ineleastic -- but my bet is in the long run it will make little difference.

Read more »

Tackle illegal political funding for sustainable growth

First published in The Korea Herald.

With the general election in Korea just a couple months away, a recent report by the Organization for Economic Cooperation and Development appears to be timely.

The report, “Financing Democracy,” takes a comparative approach to examining how the funding of political parties and election campaigns has evolved, and how regulations across OECD member and partner countries have been established.

From an economic standpoint, this is important because it shows how the politician-business nexus can hamper economic growth. As long as it continues to exist, vested interests will rule supreme, rather than national interests.

In particular, the report assesses the risks of policy capture through the funding of political parties and electoral campaigns, identifies regulatory loopholes and implementation gaps in existing policies, and suggests a comprehensive approach to integrity, including issues such as lobbying and conflicts of interest.

Korean policymakers, in particular the National Election Commission, could do well to heed the recommendations the report makes. They should particularly focus on the cross-country comparison, as it features detailed country case studies of Canada, Chile, Estonia, France, Korea, Mexico, the United Kingdom, Brazil and India -- providing in-depth analyses of their political finance mechanisms and challenges in different institutional settings.

As the report notes, money in politics is a double-edged sword. It is a necessary component of the democratic process, enabling the expression of political support as well as competition in elections.

“Yet, the increasing concentration of economic resources in the hands of fewer people presents a significant threat to political and economic systems. If the financing of political parties and election campaigns is not adequately regulated, money may also be a means for powerful special interests to exercise undue influence, and ‘capture’ the policy process,” it notes.

For example, access to public procurement has been used by elected officials to “return the favor” to corporations that have made significant contributions to their campaigns or to exclude those that supported their opponents. While high-spending areas such as infrastructure and urban planning are particularly vulnerable to the risk of policy capture, any policymaking process can be a target of powerful special interests.

This sort of leverage has always been used in Korean elections, and to a larger extent in presidential elections. That the Four Rivers Restoration Project and energy diplomacy bulldozed through by former President Lee Myung-bak were mired in corruption immediately comes to mind.

The OECD report points out that countries’ experiences have revealed that several shortcomings still exist and are vulnerable to exploitation by powerful special interests.

Many countries struggle to define and regulate third-party campaigning in particular, to prevent the rechanneling of election spending through supposedly independent committees and interest groups.

At the moment, only a few countries, such as Canada, Ireland, the Slovak Republic, the United Kingdom and the United States have regulations for third-party campaigning. Significantly, Korea is missing from the list.

While Korea bans all anonymous donations to political parties, the information disclosed needs to be organized in an intelligible and user-friendly way to facilitate effective public scrutiny. Civil society organizations and the media can only be effective watchdogs if substantive political finance information is publicly available for their analysis. That is not the case here.

It is essential to tighten lobbying standards for sustainable and broad-based economic growth. While disclosure of private interests by decision makers is widely adopted by countries to manage conflict-of-interest situations and identify suspicious financial flows in public decision-making, verification and auditing of disclosure forms are not strictly practiced, more so in Korea.

As the report notes, since being enacted in 1965, the Political Fund Act in Korea has undergone 24 revisions for the purpose of guaranteeing the fair provision, and transparency, of political funds. The term “political funds” is defined as money, securities or goods provided to persons engaged in political activities, including political parties, in addition to expenses that they need to undertake political activities, including elections.

With the aim to guarantee the proper provision of political funds, secure the transparency of political funds and contribute to the sound development of democratic politics by preventing illegal political funding, the act lays out many basic principles.

In August 2005, the National Assembly revised the act so that all corporations and groups were fundamentally prohibited from making political contributions with the aim of initiating political reforms and addressing problems with illegal political funds.

However, is it strictly followed? It appears not, going by the regular news of slush funds by corporate honchos and raids by prosecutors.

Under the act, any political party may collect party membership fees. However, it does not set an upper limit on the fees that may be paid by an individual political party member.

When an association that raises political funds for a National Assembly member or a candidate to run in an election for public office submits a financial report, it is required to disclose the personal information of donors who make contributions exceeding a set amount. This rule is often flouted in Korea.

According to financial reports submitted by political parties in 2015, the total membership fees collected was $52 million, 25.8 percent of their total income of $201.3 million. South Korea’s ruling Saenuri Party collected $26.4 million in membership fees, which made up 27 percent of its total $97.6 million income. The main opposition New Politics Alliance for Democracy party, now renamed The Minjoo Party of Korea, collected $21.2 million, making up 23.1 percent of its $91.7 million total income.

Since it was not an election year, the external funding for campaigning has obviously not been included. However, elections are due in April this year, and there will obviously be more funding details available at the end of the year.

Unlike Western political parties, party membership fees in Korea are too insignificant to be of importance for political party financing. It is no secret that the candidates receive massive funding from outside sources and under the table.

In the current context of economic crisis, there is a need for more transparency in public life. Particular attention should be paid to risks to the independence of political actors and public office holders as well as risks of conflicts of interest, even undue influence and corruption, related to money in the political sphere.

Political finance disclosure combined with adequate enforcement capacities has been recognized by international standards as a key policy instrument for promoting effective transparency and integrity in party and campaign financing. It is time the authorities in Korea started enforcing existing rules, and if necessary tightened the rules with regard to corporate funding of political parties.

The lack of transparency in political funding in Korea poses alarming risks of corruption. This is because private contributions effortlessly turn into a conduit for buying favors.

The current law punishes violators of political funding more severely, but the president’s special amnesty powers have long been abused. Many politicians and businessmen convicted of political funding fraud have been pardoned by whichever president is in power.

More transparent, competitive and realistic election campaign funding management is a must for the development of democracy. It will go a long way in ensuring the sustainable and broad-based economic development of Korea, which will propel it to an advanced-nation status.

Read more »