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Why Korea's Cleanup Won't Catch On (Int'l Edition)


International -- Cover Story

WHY KOREA'S CLEANUP WON'T CATCH ON (int'l edition)

It reads like a classic tale of revenge in a feudal court, with President Kim Young Sam purging his predecessors in a bid to secure his own future. But the bribery indictments of former President Roh Tae Woo and seven top businessmen on Dec. 5 are clear evidence that as South Korea's democracy deepens, the corrupt old system is gradually giving way to one that is more transparent and market-oriented.

Speaking before a national TV audience in sad, reverent tones, senior prosecutor Ahn Kang-Min outlined a pattern of massive corruption entrenched at the highest levels of Korean society. Ahn said his team of 92 investigators had questioned 400 witnesses and found that 35 business groups gave a total of $369 million in bribes to Roh during his term that ended in 1993.

Samsung Chairman Lee Kun-hee led the list, with $32 million in bribes. Daewoo Chairman Kim Woo-choong was just behind, with $31 million, including $13 million for a contract to build a submarine base and other favors. The bribes were often paid for specific government contracts. But Ahn said Roh also extorted money from businessmen on a regular basis in exchange for their staying in the government's good graces.

The disclosures left Koreans with a feeling of shame and resentment. Yet the view that Roh shook down the chaebol, rather than vice versa, led to relatively lenient treatment of their chairmen. So did fear that their detention would hurt their conglomerates' operations and dampen the country's economy in the runup to next April's general election.

For that reason, the seven chairmen who were indicted on Dec. 5 were not detained. Instead, they are free to work as they face trials that are expected to conclude next spring in suspended sentences or fines. The stiffest punishment so far went to Hanbo Steel & General Construction Group Chairman Chung Tae-Soo. He is in prison.

"SURVIVAL TAX." The outcome was widely expected, and the Korean bourse rose 2% by the end of trading Dec. 6 on optimism that the worst was over. At the chaebol, however, the mood remained sullen. A spokesman for Samsung was defensive, saying "the practice of making `donations' was part of a political climate that was customary and particular to a specific period in our history." In private, one executive termed the bribes "a survival tax" and criticized the indictments as politically motivated.

But the exposures should sharply reduce payoffs in Korea. And that means the chaebol will have to compete more on merit. It will also hasten the groups' transition from autocratic, family-run businesses to professionally managed enter-prises. The government has already considered requiring them to appoint more outside directors to their boards. These developments come as the government is overhauling its financial sector, opening the door to more foreign companies, and moving toward more professional administration of taxation. "The scandal will help the Korean economy become much stronger," says Cho Dong-Sung, a professor at Seoul National University's college of business administration.

A key question now is whether Korea's purification process will send reverberations throughout East Asia. The sort of political and economic reform that Kim is promising certainly hasn't happened in Japan. There, the Liberal Democratic Party, dethroned by a series of scandals in 1993, is back as the biggest partner in the ruling coalition. Promised political reforms are full of loopholes, and they have yet to be tested in a general election.

Similarly, in Taiwan's Dec. 2 election, voters expressed disgust with the corrupt ways of the ruling Nationalist Party, but there is little prospect of a fundamental assault on dirty-money connections between business and politicians. Taiwan's legal system makes it difficult to punish officials who play money politics since there are no laws or regulations governing corporate donations to political candidates or parties.

Other Asian economies are much less sophisticated, and bribery involving generals, children of ruling families, and bureaucrats is likely to remain entrenched. That's why experts looking for signs of structural change concentrate on the most advanced economies in the region, such as Korea's.

To be sure, the government's role in Korea's economy will remain larger than it is in, say, the U.S. But Korea's ability to confront graft is genuine and owes much to its style of democracy. Unlike most countries in the region--even nominally democratic Japan--Korea's political system was shaped by something akin to a popular violent revolution. The watershed came in 1987, when the middle class joined students in demonstrations that forced former general and then-President Chun Doo-Hwan to relinquish the military's grip on power and hold a direct presidential election. Chun is now under arrest for his role in the 1979 military coup.

The result is a Korean polity that feels more enfranchised than Japan's. While the Korean public shaped its government, the Japanese people received their constitution from the U.S. "Korea has become a democracy, but one that wants to examine how it got here, how much it cost, and who is responsible," says Chalmers Johnson, president of the Japan Policy Research Institute in Cardiff, Calif. That dynamic has allowed Kim to use the slush-fund scandal not only to seek retribution against his predecessors but also to expose government-business collusion.

RESENTMENT. Korea, says Tokyo-based management consultant Kenichi Ohmae, is likely to greatly reduce the flow of money from big companies to politicians and bureaucrats and to cut back on the government's ability to control funding for business through the banks. "I think they will do a complete overhaul of the system," he says. Spurring them on: a desire to comply with standards of the Organization for Economic Cooperation & Development, which Korea hopes to join next year.

Desire for change is also fueled by resentment of the chaebol. The favors they received for bribes have exacerbated the sense that the chaebol, and the families that control them, are too powerful. Koreans were outraged that Roh and his predecessors allegedly took routine cuts of major infrastructure and defense projects. Bureaucrats needed to implement projects were also cut in on deals, as were national assemblymen vying to steer projects to their districts, says Chang Dal-Joong, a political science professor at Seoul National University.

All of these factors have created a momentum for change in Korea more powerful than any forces at work in Japan. True, Japan's economy bears many comparisons to Korea's and is many times bigger and more complex. If a capitalist system and a broad middle class were all that mattered, Japan's decision-making would be the most transparent in the world. Instead, despite Japan's corruption scandals, its politicians have done little to ventilate the country's stuffy economic and political systems.

Ironically, one reason Japan may be more resistant to sweeping reform is that its system is more mature and balanced than Korea's. The Korean chaebol are roughly patterned after Japan's huge keiretsu. But more of Japan's companies are professionally managed, enjoying tighter, smoother patterns of cooperation with the ministries that oversee them. An example of that is the tradition of high-level government officials retiring into corporate boardrooms, a practice known as amakudari, or descent from heaven.

Another difference: Japan's elite bureaucrats hold most of the cards, and they tend to be relatively clean. Politicians, who receive most of the illicit funds, play minor roles in policymaking. The bureaucracy still attracts the country's best and brightest, and it retains the public's trust despite scandals at a number of ministries. So while the Japanese feel little desire or ability to take on the system, the Koreans sense injustice and want improvements.

Elsewhere in Asia, expanding economies, growing middle classes, and feistier media are putting new pressure on governments to clean up corruption. But no country has a political dynamic comparable to Korea's. Since Taiwan's martial law was lifted in 1987, for instance, the press and the public have become more outspoken about corruption and ties between big business and politicians. The government has also attempted to scrub its image by denouncing money politics, cracking down on vote buying and passing laws requiring officials to reveal their assets. But so far, there has been little bite behind the bark.

Unlike Europe, Asia's newly powerful economies haven't felt real pain from the cost of corruption yet, and their governments are prone to dismiss--if not justify--bribery as an Asian way of doing business. It's not. But it may be years before the people of East Asia discover the same impulse that has driven South Korea to confront a system built on graft.

A Study in Contrasts

JAPAN

WHAT HAPPENED

Scandals beginning with Recruit in the late 1980s destroy Prime Minister Yasuhiro Nakasone and others. But the only real indictment is against Liberal Democratic Party kingpin Shin Kanemaru.

THE OUTCOME

Little structural change. The LDP is once again the dominant power in the ruling coalition, and business money still flows into its coffers. Electoral reforms have yet to take hold.

SOUTH KOREA

WHAT HAPPENED

Former President Roh Tae Woo's $650 million slush fund results in his arrest and indictment. Leaders of Hanbo business group and six others are arrested and indicted on bribery charges.

THE OUTCOME

Analysts expect the scandals to sharply reduce dirty-money flows from business to politicians and bureaucrats. But the government needs to relax its influence over private-sector decision-making.

DATA: BUSINESS WEEKBy Steven Brull in Seoul, with Margaret Dawson in Taipei, and bureau reports


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