By most measures, South Korea has implanted itself among the globe’s economic success stories. The onetime agrarian backwater has emerged as an icon of manufacturing, technology — and cool.
Fifty million people have defied geography and history, rebounding from a 35-year Japanese occupation and the Korean War to create a thriving capitalist democracy along the world’s most heavily fortified border. South Koreans in 1970 earned an average of $254 a year — less than the $435 earned by their North Korean brethren. Last year, they averaged $22,708.
Overseas investors are embracing South Korea. They bought 55.6 trillion won ($49.3 billion) more in South Korean stocks and bonds than they sold in 2012. The benchmark Kospi Index had doubled to 2,001.20 as of May 29 from October 2008, when the subprime crisis roiled global markets.
Family-controlled conglomerates known as chaebols, cranking out memory chips, liquid-crystal-display screens and tablet computers, have made South Korea the seventh-largest exporting nation.
Samsung sells more smartphones than Apple, while Hyundai, once known for unreliable cars, is aiming at BMW in luxury vehicles. Sales of the top 30 chaebols equaled 82 percent of South Korea’s $1.12 trillion gross domestic product in 2012, up from 53 percent in 2002.
Seoul, the work-obsessed capital of 10.4 million, is the epicenter of the buzz. Workers whose parents once toiled in uniforms making wigs and toys flock to office towers sporting Chanel and earbuds, traveling there in subways equipped with free Wi-Fi.
The world’s most wired country runs on “pali, pali” or “quickly, quickly,” as people in cafes along Garosu-gil Street swap quips or compete in a one-minute game called Anipang on ubiquitous mobile phones. Aspirations are soaring as parents hire English tutors for their children while indulging in plastic surgery for themselves in the Gangnam neighborhood south of the Han River. “K-pop” hits, soap operas and “Gangnam Style,” rap artist Psy’s record-setting video spoof of over-the-top consumption, spread the vibe worldwide.
“Korea is going through a renaissance,” says Richard Min, a Korean American who moved to Seoul from Boston in 2000 and co-founded technology incubator Seoul Space. “It’s cool to be Korean.”
Park, the Republic of Korea’s 11th president and its first female leader, is striving for more than coolness. The daughter of former president Park Chung-hee, the military strongman who championed the country’s industrial chaebols, says that to sustain growth, South Korea must move beyond those conglomerates and encourage small businesses.
“The past economic model designed to catch up with advanced economies drove Korea’s rapid growth, but it has lost steam,” Park said.
She seeks to add 2.5 million jobs during her five years in office — 410,000 of them in areas overseen by her cumbersomely named Ministry of Science, ICT and Future Planning. She plans tax incentives for entrepreneurs and venture capitalists and an alternative stock market to help companies raise money.
“The president’s drive to create new jobs started from a humble realization that we need to do something radically new,” says Cho Won-dong, the president’s senior secretary for economic affairs, discussing Park’s strategy in his office near the Blue House.
Min, for one, is pumped. “President Park Geun-hye has decided ‘creativity’ and ‘innovation’ are the new key words,” the 39-year-old says. “If we grow the way Koreans love to grow, there is no reason we can’t be bigger than Silicon Valley.”
Dual forces lend urgency to Park’s mission: South Korea’s aging population and falling birth rate, and the economic dynamics of its neighbors.
While much of the world assumes that the South’s most vexing challenge is North Korea’s volatile new leader, Kim Jong Un, South Koreans worry more about finding good jobs and staying economically competitive with the real giant to the north — China, the No. 2 global economy. They are also looking anxiously at Japan, the country that China eclipsed, as Prime Minister Shinzo Abe drives down the yen.
Sixty years after the armistice that formally ended hostilities between the two halves of the Korean peninsula, only 15 percent of Southerners said North Korea was a priority, a February survey by Seoul’s Asan Institute for Policy Studies found. Their top concerns were reducing household debt, in which South Korea ranks eighth in the world when measured against disposable income; lowering the 8.4 percent youth jobless rate; and remaining in the middle class.
Women, who are paid 39 percent less than men for the same job, are hoping Park will narrow an income gap that was the highest among 34 Organization for Economic Cooperation and Development members.
Park says the ticket to expansion is a creative economy underpinned by entrepreneurs and venture capitalists. “Growth led by a few big firms and the government is bound to be limited,” she has told policymakers.
While Park is only now unrolling the details, investors like what they have seen.
“President Park’s goals are very good and, if achieved, will take Korea to the next stage,” says Mark Mobius, executive chairman of Templeton Emerging Markets Group. Mobius oversees more than $50 billion in emerging-markets equities, about 4 percent of them South Korean stocks.
Park has her work cut out for her. The boom that has allowed people to splurge on luxuries is ebbing. One immediate challenge is a slowdown in China, which has become the largest buyer of South Korean exports. Longer term, China, with a research and development workforce of 2.3 million — seven times that of South Korea’s — looms as a formidable competitor.
“China has no fear of Korea anymore, so we now have to come up with something different,” says Cho, 56, the senior economic secretary, who has a doctorate in economics from the University of Oxford and who served on President Kim Dae-jung’s economic team during the Asian financial crisis in 1998. “President Park Geun-hye’s solution is a creative economy.”
South Korea’s economy expanded by 2 percent last year, the slowest pace since the 0.3 percent rate in 2009. The central bank has twice this year cut 2013 projections, with the estimate of 2.6 percent on April 11 a downgrade from its initial forecast of 3.2 percent.
Park is mindful of her country’s demographic time bomb. The population is aging at the fastest pace of any advanced nation, the OECD says. The available workforce will dwindle starting in 2017. By 2026, one of five South Koreans will be 65 or older, a level the United States won’t reach until a decade later.
Already, the middle class is shrinking and people are falling back into poverty as the division between rich and poor widens. The top 20 percent of South Koreans earn more than five times as much as the bottom 20 percent.
Park aims to have 70 percent of South Koreans in the middle class, with incomes that range today from $18,500 to $55,500, by term’s end. She wants more South Koreans to work, too. Her goal is to employ 70 percent of people ages 15 to 64, up from 64.2 percent in 2012.
“The new administration seeks to establish an economic system characterized by a virtuous cycle of growth, employment and distribution,” Park said.
The president administered an economic booster shot in April. She unveiled a 17.3-trillion-won ($15.3 billion) supplementary budget, the largest of its kind since the Asian financial crisis. She created the National Happiness Fund to help low-income earners consolidate or refinance household debt, which totaled 959 trillion won ($850 billion), equal to 136 percent of disposable income, at the end of 2012.
Park took her campaign for a creative economy to the United States in May. Stopping in New York, she extolled South Korean video artist Nam June Paik, who died in 2006. “The U.S. invented the video,” Park told supporters at the Waldorf-Astoria Hotel. “Japan provided it to households. Korea made it art.”
At a White House meeting, Park and President Obama
pledged to form a united front against North Korea’s threats. She told Congress she would “write a sequel” to South Korea’s transformation story.
Accompanied by a 51-member economic delegation that included Samsung Chairman Lee Kun-hee and Hyundai Motor Chairman Chung Mong-koo, Park met U.S. business leaders in May. In Los Angeles, she brainstormed with venture capitalists, executives and Jennifer Yuh Nelson, the Korean American director of “Kung Fu Panda 2.” Park took advice from a participant to invest in a yet-to-be-determined U.S. venture capital fund, which would in turn invest in South Korean start-ups.
“Hopefully, we can create another Apple or Google on Korean soil,” Cho says.
Park’s entrepreneurship drive will be difficult in a country still dominated by conglomerates, says Bruce Cumings, a history professor at the University of Chicago.
Led by the chaebols, South Korea’s economy has expanded every year in the past five decades except for two: 1980, during the oil shock, and 1998, amid Asia’s financial crisis. Outbound shipments by the 30 largest companies accounted for 84percent of South Korea’s exports in 2010.
“Corporate bigness has been a key to Korean success, and the most successful chaebol, Samsung, now rivals Apple,” says Cumings, who has written nine books on Korea. “Samsung’s prowess is not exactly an argument for small-bore entrepreneurship.”
Choi Seok-won, head of Hanwha Investment & Securities’ research center in Seoul, counters that many chaebol jobs don’t benefit South Koreans. The overseas production of South Korea’s large manufacturers jumped to 16.7 percent of their total output in 2010 from 6.7 percent in 2005. Hyundai builds cars abroad, and Samsung plans a campus in Palo Alto, Calif., complete with a start-up incubator.
“Chaebols are phenomenally successful, but they no longer create jobs at home,” Choi says.
Chaebols also have acquired a reputation for bending the rules, says Shaun Cochran, head of Korea research at the Hong Kong-based brokerage CLSA Asia Pacific.
“People in Korea don’t trust the power structure at the top, because of a long history of leaders with special exemptions,” he says. From 1990 to 2012, the heads of seven of the 10 biggest chaebols were sentenced to prison for bribery, embezzlement and tax evasion. None spent more than a few months behind bars.
“If Park Chung-hee’s legacy was nurturing the chaebols, it is his daughter’s chance to come full circle,” Cochran says. “She has to turn her back to close relationships her father had. She has to stand up and say those days are over.”
While Park’s policies regarding the chaebols are evolving, she has shown backbone in dealing with the North. In April, North Korea threatened to rain nuclear missiles on South Korea, and the United States removed 53,000 workers from the Gaeseong industrial zone — a jointly run operation just north of the border and the only existing symbol of Korean cooperation. After the North rejected talks, Park ordered all South Koreans to leave the complex, determined not to succumb to pressure designed to extract concessions.
“The Republic of Korea will never accept a nuclear-armed North Korea,” Park told the U.S. Congress in May. “Pyongyang’s provocation will be met decisively.”
Less than two weeks later, North Korea test-fired six short-range missiles in defiance of international sanctions. Park’s approval rating rose.
John Linton, a doctor who was born in South Korea to American parents, says Park’s determination reminds him of her father’s.
A fourth-generation resident, Linton, 53, lived through South Korea’s transition to democracy from dictatorship and was a teenager when two tragedies befell the Park family. In 1974, Park Chung-hee was speaking at the National Theater of Korea when a North Korean agent named Mun Se Gwang opened fire. He killed first lady Yuk Young-soo while aiming for the president. In 1979, Park Chung-hee was assassinated by intelligence chief Kim Jae-kyu for reasons that remain unclear.
Linton talked with Park Geun-hye in 2002. She had just returned from Pyongyang, where she met Kim Jong Il, the current dictator’s father, who died in 2011. Linton asked how she could have visited the man who engineered her mother’s assassination. Park looked at him coldly.
“My family’s interest is my family’s interest, and my country’s interest is my country’s interest,” he recalls her saying. “They are different.”
Park Chung-hee, a major general in the South Korean Army, spearheaded South Korea’s growth into an industrial powerhouse. From 1961 to 1979, he showered the chaebols with loans and tax breaks. In 1972, he unveiled a new constitution that increased a president’s tenure and removed limits on reelection, marring his legacy. Students protested, and opposition leader Kim Dae-jung decried the move.
Kim, who died in 2009 at 85, became president in 1998. He won the Nobel Peace Prize in 2000 for his pro-democracy campaigns and work toward a historic inter-Korean summit.
Now, the strongman’s daughter is unveiling incentives for the next wave of South Korean businesses. For companies three years old or younger, she’s expanding tax breaks for angel investors and establishing the government-run Future Creation Fund, which, along with private contributions, will hold 200 billion won ($177 million) in seed money. She plans tax incentives to sellers or buyers of companies that are four to nine years old and a similar 300-billion-won ($266 million) fund. For firms 10 to 15 years old, Park is proposing a stock market called the Korea New Exchange, or Konex, for raising capital.
“As a government, we cannot create creativity but an environment where start-ups can thrive,” says Choi Mun-kee, 62, the new science and ICT minister.
“Entrepreneurs are going to be encouraged to take risks, allowed to fail and get another chance, raise capital easily and exit through mergers and acquisitions,” he says.
The price of failure is high in South Korea. A business owner has little chance of rebounding from bankruptcy. South Korea’s small and mid-size companies raised 99 percent of their combined 472 trillion won ($418 billion) of capital through loans last year, the government says.
“If you start a business and fail, that failure sticker will be with you for the rest of your life,” says Daniel Shin, founder of TicketMonster, South Korea’s biggest shopping-deal Web site. He says South Koreans define success as being a doctor or a lawyer, not an entrepreneur.
Choi wants to fight that perception by celebrating start-ups such as KakaoTalk, a free messaging service for smartphones with 88 million worldwide users. Seated in his office among framed commemorative stamps of Psy, Choi also praises Golfzon, creator of a virtual golf game that simulates outdoor courses, and Delight, which developed a hearing aid using a 3-D printer.
The government, with its history of intervening in the economy, has a good chance of sparking a Korean-style Silicon Valley, CLSA’s Cochran says.
“Korea is one environment that is able to bring together a large number of industries,” he says. “The government will get behind it. The banks will get behind it. And the companies will get behind it.”
Park’s effort to build small companies reflects not only an economic strategy but also empathy for the little guy — a trait she shares with her late mother. Park was 9 when her father grabbed power from Prime Minister Chang Myon in a 1961 coup and she and two younger siblings moved to the Blue House. Yuk, the first lady, established a foundation for children’s welfare that ran a kindergarten and a science center. She once brought a young beggar to the presidential house to feed and bathe him.
In December, Park defeated Moon Jae-in in the presidential race, winning 51.6 percent to 48 percent. Donald Gregg, U.S. ambassador to South Korea from 1989 to 1993, says Park has adopted traits of her father and her mother.
“The new president has inherited both her parents’ best qualities: her father’s tenacity and intelligence and her mother’s grace,” says Gregg, who knew Park’s parents.
As South Koreans adapt to Park’s creative economy, some envision an even larger boom triggered by reunification. Thirty or 40 years after a Korean reunification, their combined GDP could exceed that of France, Germany or Japan, predicts Kwon Goohoon, Goldman Sachs Group’s chief economist for Korea.
For now, the North, even with a bellicose leader whom many people believe hasn’t yet turned 30, doesn’t faze a new crop of businesspeople returning to South Korea.
In Park’s view, the South Korea that arose as an industrial giant under her father has the potential to become the next Silicon Valley.
As she puts it, “One person can change the world, like Bill Gates and Steve Jobs.”
The full version of this Bloomberg Markets article appears in the magazine’s July issue.