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Originally published July 18, 2013 at 10:36 PM | Page modified July 21, 2013 at 9:20 AM

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Park Geun Hye agenda challenging chaebols in South Korea

South Korea, the one-time agrarian backwater, has emerged as an icon of manufacturing, technology — and cool.

Bloomberg News

South Korea at a glance

South Korea has emerged from the Korean War 60 years ago into a major economic powerhouse. It also has secured a nonpermanent seat (2013-14) on the U.N. Security Council and will host the 2018 Winter Olympic Games.

Urbanites: 83 percent of total population live in cities.

Major cities: Seoul (capital) 9.8 million; Busan (Pusan) 3.5 million; Incheon (Inch’on) 2.6 million; Daegu (Taegu) 2.5 million and Daejon (Taejon) 1.5 million.

Exports worth: $552.6 billion.

Top exports: Commodities, semiconductors, wireless telecommunications equipment, motor vehicles, computers, steel, ships and petrochemicals.

Export partners: China, 24.4 percent; U.S., 10.1 percent; and Japan, 7.1 percent.

Imports worth: $514.2 billion.

Top imports: commodities: machinery, electronics and electronic equipment, oil, steel, transport equipment, organic chemicals, plastics

Imports partners: China, 16.5 percent; Japan, 13 percent; U.S., 8.5 percent; Saudi Arabia, 7.1 percent; and Australia, 5 percent.

CIA World Factbook

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With North Korea escalating its threats to test a ballistic missile, South Korean President Park Geun Hye was conferring with Bill Gates on another pressing matter.

Seated across from the Microsoft co-founder on April 22 at a formal dining table in the Blue House, her official residence, Park picked the tech mogul’s brain about how to nurture entrepreneurs to keep the world’s 15th-largest economy humming.

“If there are more people like you, we will be able to create the world we dream of,” Park told the smiling Gates.

By most measures, South Korea has already implanted itself among the globe’s economic success stories. The one-time 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.

Family-controlled conglomerates known as chaebols, cranking out memory chips, liquid-crystal-display screens and tablet computers, have made 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. 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 late President Park Chung Hee, the military strongman who championed the country’s industrial chaebols, says 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 in a written reply to questions.

She aims to add 2.5 million jobs during her five years in office — 410,000 of them in areas overseen by the Ministry of Science, ICT and Future Planning. (ICT stands for Information and Communications Technology.) 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.

Creative economy

Dual forces lend urgency to Park’s mission: Korea’s aging population and falling birthrate 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 themselves 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.

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 told policymakers in April.

While Park is only now unrolling the details, investors like what they have seen so far.

“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, who oversees more than $50 billion in emerging-markets equities, about 4 percent of them 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 greater than 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 senior economic secretary Cho. “President Park Geun Hye’s solution is a creative economy.”

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.

“One person can change the world, like Bill Gates and Steve Jobs,” she told top officials at the Blue House on April 18.

So says the general’s daughter, the latest leader of a country that has survived war and privation and developed a decades-long habit of outsmarting its neighbors and confounding expectations.

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.

Aging Koreans

Park is mindful of her country’s demographic time bomb. The population is aging at the fastest pace of any advanced nation, according to the Organization for Economic Cooperation and Development. The available workforce will dwindle starting in 2017. By 2026, one of five Koreans will be 65 or older, a level the U.S. won’t reach until a decade later, Statistics Korea says.

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 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.

Happiness fund

The president administered an economic booster shot in April. She unveiled a 17.3 trillion won supplementary budget, the largest of its kind since the Asian financial crisis. She created the so-called National Happiness Fund to help low-income earners consolidate or refinance household debt, which totaled 959 trillion won, 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 the late Korean video artist Nam June Paik.

“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 the U.S. Congress she would “write a sequel” to Korea’s transformation story.

Accompanied by a 51-member economic delegation that included Samsung Chairman Lee Kun Hee and Hyundai Chairman Chung Mong Koo, Park met U.S. business leaders May 8. In Los Angeles, she brainstormed with Jennifer Yuh Nelson, the Korean-American director of “Kung Fu Panda 2;” venture capitalists; and executives. She took advice from a participant to invest in a yet-to-be-determined U.S. venture capital fund, which would in turn invest in Korean startups.

“Hopefully, we can create another Apple or Google on Korean soil,” says economic adviser Cho, who accompanied the president to the U.S.

Dominant chaebols

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, 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 84 percent 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, including “The Korean War” (Random House, 2011). “Samsung’s prowess is not exactly an argument for small-bore entrepreneurship.”

Choi Seok Won, head of the research center of Hanwha Investment & Securities in Seoul, counters that many chaebol jobs don’t benefit Koreans. The overseas production of 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 Palo Alto, Calif., campus complete with startup 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 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 have been 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.”

Entrepreneurial programs

For companies three years old or younger, she’s expanding tax breaks for angel investors and establishing a government-run Future Creation Fund, which, along with private contributions, will hold 200 billion won of 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 fund.

For firms 10 to 15 years old, Park is proposing a stock market called the Korea New Exchange, or Konex, for capital raising. It would supplement the Kosdaq, Korea’s version of the tech-heavy Nasdaq.

“As a government, we cannot create creativity but an environment where startups can thrive,” says Choi Mun Kee, the new science and ICT minister.

Choi, as president of the Electronics and Telecommunications Research Institute, laid the foundation for Korea’s mobile phone industry.

“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.”

The price of failure is high in South Korea. A business owner has little chance of rebounding from bankruptcy. Korea’s small and midsize companies raised 99 percent of their combined 472 trillion won 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 website. He says Koreans define success as being a doctor or a lawyer, not an entrepreneur.

Choi wants to fight that perception by celebrating such startups 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, 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 Korea-style Silicon Valley, says Cochran, of the brokerage firm CLSA.

“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.”

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