International Business: SOUTH KOREA
RUNNING SCARED IN SEOUL
Roh Tae Woo's son and younger brother spoke softly and bowed to South Korea's former President as he ducked into his waiting limousine outside his house. Dozens of camera cars trailed the motorcade on Nov. 15 for the 17-minute ride to the public prosecutor's office across town. For Roh, who confessed three weeks ago to amassing a $650 million slush fund, the trip seemed likely to be one of his last as a free man.
As evidence piles up in a spectacular probe of payments by businessmen to politicians, Roh's arrest has appeared increasingly likely, making him the first former President of South Korea to face criminal charges. His prospective immediate home: the Seoul Detention House on the city's outskirts, where guards were preparing an isolated cell little bigger than a single bed. Roh's arrest would also be the climax to a high-profile investigation that featured the questioning of 36 leaders of the nation's giant chaebol, or conglomerates, for suspected bribery. The business deals involved range from supplying naval craft to construction of power plants and satellite cities.
While Koreans remain transfixed by the unfolding drama, the scandal is sending a signal that the corrupt old ways of doing business in Korea are under assault. The full impact of the crisis on Korea's political and corporate worlds remains hard to predict. But at a minimum, the investigation by senior prosecutor Ahn Kang-Min is putting a damper on bribery at the highest levels.
ASHAMED. The chaebol chiefs summoned to testify include Hyundai's Chung Ju-Yung, Samsung's Lee Kun-Hee, LG's Koo Cha-Kyung, and Daewoo's Kim Woo-Choong. Most have acknowledged making payments, and according to Chosun Ilbo, a leading daily, the top five chaebol each shelled out more than $25 million during Roh's five-year term.
The deeply corrupt business-government relationship being disclosed by the scandal has made Koreans ashamed and angry. Even if only Roh and a few chaebol leaders go to jail, the dishonor cast on the entire corporate and political Establishment is sending a warning message. The result is likely to be an acceleration of moves towards less corrupt, more open business practices in an economy still so regulated that it makes Japan's look laissez-faire. Korea has already started gradually opening many business sectors to foreign investors, for example, and this week added an additional 48. Fields from investment banking to gas stations will open up between 1996 and 2001. Other liberalization moves have been introduced.
But the high-profile flogging of Korea Inc. alone may not be enough to end the rampant bribery that runs through the economy--especially at lower levels. That will require massive cuts in economic regulations and the bureaucracy that administers them. "Bribery has been used as a lubricant because regulations are so strict as to kill the economy," says Lee Han-Koo, president of the Daewoo Research Institute.
How much change the scandal will trigger depends on how President Kim Young Sam plays it. To satisfy public outrage, he must respond to rising pressure to send Roh to jail. Such a punishment would be a sign of Korea's increasing democratization, reflecting the growing power of public opinion. There's a danger, though, that the scandal could spiral out of control. To many, Kim appears to be using the crisis to discredit rival pols, including opposition leader Kim Dae-Jung, who confessed to taking about $2.5 million from Roh in 1992. Kim Dae-Jung could retaliate by launching street protests demanding that the President reveal details of his own funds, including campaign money he may have received from Roh. The result could be political chaos before next April's general elections.
However, the government is determined not to let the uproar capsize the economy, which is expected to continue to grow at a fast 7.5% clip next year, after this year's 9.1%. The betting is that to avoid rocking the economic boat, the government will arrest only a few leaders of the smaller chaebol. That's because the major conglomerates are so crucial to Korea's growth and international expansion. The top 30 chaebol, along with the masses of subcontractors they control, account for more than half of the nation's gross domestic product.
No matter what the outcome, though, the scandal shows the progress Korea has made in transforming itself from a poverty-stricken military dictatorship. After the military seized power in a 1961 coup, the government wielded total control of the economy, setting industrial policies and picking tycoons like Hyundai's Chung Ju-Yung to carry them out. Favored businessmen had access to scarce credit and protection from competition. The quid pro quo was an obligation to make "political contributions" to the President.
MAKE THE LEAP. Kim Young Sam, who became Korea's first elected civilian President in three decades in 1993, took changing this old order as his mission. He pushed through key reforms such as the law that bans bank accounts held under false names and the requirement that politicians disclose their personal assets. These have enabled prosecutors to pursue Roh.
Kim seems to realize that the old order has hobbled South Korea's attempt to make the leap from Asian Tiger to advanced industrial nation. That yearning is symbolized by Korea's drive to become a full member of the Organization for Economic Cooperation & Development, which Seoul hopes to join next year. But Korea's overregulated domestic market and rules promoting export-led growth still rankle trading partners.
Korea's bid for OECD membership is likely to limit some aspects of the scandal probe. Analysts expect it will deter tough questioning of foreign companies that are the partners of many chaebol and may have paid bribes. Still, the scandal has stirred up old suspicions, such as allegations that a unit of Lockheed Martin Corp., formerly part of General Dynamics Corp., greased Roh's palm with a cool $140 million in connection with a 1991 sale of F-16 fighters. The rumors are resurfacing even though the U.S. General Accounting Office cleared General Dynamics of the allegations and a Korean probe begun last year has yet to find evidence of wrongdoing.
Longer term, many foreign companies see benefits flowing from the scandal. It is likely to make bribery in Korea more risky, so it also should make resistance easier. Politicians and bureaucrats will be less likely to demand massive funds, and companies will find it less difficult to say no. U.S. aerospace executives reckon their refusal to play the game has resulted in European companies grabbing more than half of Korea's overseas defense procurement contracts. "Now that these things have been brought out into the open, you have to have optimism that we will have greater transparency," says David Kim, country manager for insurance brokers Johnson & Higgins.
Still unclear, however, is whether turmoil at the top will change the practices further down. For Korean business there remains what Daewoo Research's Lee calls "involuntary pseudo-taxation," much of it in payments to midlevel bureaucrats who wield regulatory powers. The result is that big companies involuntarily shell out 1.2% of their sales, Lee says, while small and medium-sized companies pay 0.8%.
So far, Korea's political leaders haven't seized on the slush fund as a lever to root out this widespread corruption. If they don't, the scandal convulsing Korean politics and business won't be the last.By Steven Brull and Laxmi Nakarmi in Seoul