Korea’s economic system is basically totalitarian in the sense that the government straightforwardly polices the market. The government is hands on in determining the courses and policies that the market operates on. It participates via its involvement through the central monetary institution in the determination of the fees on loans and market values.
The financial institutions, the central bank included, are charged with the sole responsibility of creating a credit and banking system which is endowed with the singular ability to expand credit and make money available. If the cost of borrowing is not interfered with by the Korean government, the economy will correct it leading to equilibrium in the quantity of money to be lent that is availed and asked for as well as bringing about stability in the commodity prices (Wall & Minocha, 2009).
The government-led regulation of loan issuance by financial institutions influences the inclinations of borrowers and their motives of being thrifty against spending. Usually, the regulated rates are lower than those required by the thrifty corporations and individuals which causes amplified uptake of loans and asset speculation over and above that could be supplied. This spurs short-term labor demand as well as expenditure in an economy as witnessed in Korea during the 1990s.
In the uninterrupted scenario like the pure capitalist or mixed economic systems, such surges are naturally eliminated but when credit terms are policed by the authorities as in the Korean case then loopholes are created. This exposes the whole financial sector of an economy to risks that may lead to crises. This is because the borrowed monies may be held for speculation or invested in unyielding ventures (Rugman & Collinson, 2009).
In Korea, there is no clear-cut line between politics and the economy. In fact, they are positively correlated in the sense that the politicians run the economy almost literally. The politicians starting from the president to the lower echelons are the majority share holders in the biggest corporations which have a significant role in the economy. Examples of these corporations are Daewoo, Samsung and Life is Good. They are owned and sometimes run by families and dynasties which manipulate the banking system, the government rules and regulations together with unlawful staving off their main competitors. They are monopolistic and often ignore indicators to unforeseen business meltdowns. The banking system on its own is full of politics given the fact that they extend credit facilities to sometimes insolvent corporations amid pressure from the government.
Korea is not a good place to invest
It is not a good investment destination and a number of reasons points out to this. One is that the overarching involvement of the government in determining prices, supply and demand of both commodities as well as money circulation is bad for the economy. With an authoritarian economic system comes a business climate dominated by uncertainties and risks which is unattractive to prospective investors.
Secondly the banking sector is largely underdeveloped and often yields to manipulation by the government and politicians as well as big corporate lobbyists. Thirdly the aim of the government is to discourage imports while encouraging exports. Investors find this unattractive because part of the inputs in their line of business need to be imported which means they will incur extra costs which are not commensurate to government’s incentives like tax exemption and export compensation (Cherunilam, 2007).
What the president can do to rescue Daewoo
Given the president’s advantageous position in influencing policy decisions in Daewoo, he can first streamline its operations to concentrate on the main businesses in which it is competent and able to realize economies of scale. This trim down will see off non profit making subsidiaries that have weighed down Daewoo over the years while the remaining businesses will prove viable due to the fact that they are now efficient and self sustaining. Furthermore the president should seek to enact neo and stringent policies in the banking sector to tame rogue financial institutions. He should also beseech creditors to convert their debts in Daewoo into equity. This way the equity can be immobilized and floated to attract new investors. Additionally he can overhaul the management.
References
Cherunilam, F. (2007). International Business: Text and Cases. 4th ed. New York: PHI Learning Pvt. Ltd.
Rugman, A.M. & Collinson, S. (2009). International business. 5th ed. New York: Prentice Hall Financial Times
Wall, S. & Minocha, S. (2009). International Business. 3rd ed. Pearson Education