Shock-Like Reform Is Needed Again for Korea to Compete Globally

(Bloomberg) -- South Korea needs another economic overhaul like the one following the International Monetary Fund bailout in the late-1990s to stay competitive globally, according to a major global restructuring consulting firm.

It’s as if Asia’s fourth-largest economy is being squeezed with a nutcracker, with China catching up to Korea and overtaking it in some sectors, while Japan is regaining its competitiveness as the economy recovers and it comes up with innovative technologies, said Yung Chung, Seoul-based managing director of AlixPartners LLP. Low productivity, high wages and overcapacity are hurting Korea’s corporate sector, he said.

“Korea needs to go through restructuring 2.0 -- 1.0 was IMF,” Chung said in an interview.

South Korea’s economic woes were highlighted in data last week that showed gross domestic product shrank the most in a decade due to declining investment, weakness in the technology sector and falling exports. Korea Inc.’s troubles are also seen in a big increase in companies whose operating income doesn’t cover interest expenses, to the most since 2014, in spite of low interest rates, according to Korea Economic Research Institute data.

“Korea must quickly eliminate the overcapacity and zombie companies that are critically burdening the economy,” Chung said.

Aggressive restructuring that results in big job losses, though, might not be welcomed by President Moon Jae-in’s administration, which has pledged to deal with the nation’s high unemployment and dwindling household income. Moon has ramped up fiscal support for Korea’s economy, announcing an extra budget last month that added to a record budget already in place for 2019.

The IMF’s bailout of Korea in 1997 forced the nation to open up more to foreign investment, cut government spending and make it easier to hire and fire workers. While the reforms helped make the country more competitive internationally, they sparked massive protests and a jump in unemployment. President Moon said in a 2017 speech that the aftereffects of the IMF rescue “have changed the lives of the people,” and that their “sense of pride in being a middle-class citizen has disappeared.”

For Chung at AlixPartners, there’s still too much stigma attached to company restructuring in Korea, and more effective measures would help rejuvenate the corporate sector.

Shorter Bankruptcies

Korea needs to push for increased private-sector participation in dealing with distressed assets and insolvencies, and should speed up bankruptcy proceedings, he said. In the U.S., companies emerge from Chapter 11 bankruptcies in 6 months on average, whereas in South Korea they take 17 to 18 months, with less chance of success, he said.

“In the U.S., restructuring is renewal,” said Chung. “In Korea, restructuring basically means you’re in final-stage cancer.”

Automotive supply companies are faced with low margins that may leave them strapped for cash in an economic downturn, while the shipyard and consumer electronic sectors are challenged by rising overseas competition, according to Chung.

Those and other sectors such as semiconductors, shipping and steel need to reduce overcapacity and invest for the future, he said.

©2019 Bloomberg L.P.