The Multinational Monitor

JUNE 1981 - VOLUME 2 - NUMBER 6


S O U T H   K O R E A

New Regime Brings More Repression and a Return to Reprocessing Goods for Sale in Japan and the U.S.

by Tim Shorrock

The first two visitors to south Korea's newly inaugurated president, Chun Doo Hwan, last March, were David Rockefeller - of Chase Manhattan Bank and Robert Kirby of Westinghouse. The U.S. had allowed Chun to deploy Korean troops under U.S. command to crush the rebellion by the people of the nation's fourth largest city, Kwangju, only 10 months before. Now came the corporations to establish. their claims on the nation under its new military ruler-moving to maintain or improve the extremely favorable relationship they had enjoyed under the previous general-turned-president, Park Chunghee.

American multinational corporations and banks have long taken advantage of south Korea's government-controlled economy to capture a low-wage, politically-weak labor force. They have used the government's power to guarantee themselves huge chunks of the Korean domestic market-with profits and market shares agreed to in advance.

Banks

By the end of 1977, U.S. private banks had loaned the Korean government and large private corporations in South Korea $3.2 billion. There are currently 13 branches of U.S banks in south Korea, whose combined profits in 1980 were $32.7 million. The three most profitable banks-Chase Manhattan, Citibank and Bank of America-were first established in Seoul in 1967; since then their profits have increased by a factor of 30. According to the Korea Times, the foreign banks' high profitability is due to the fact that "they have preferred short-term financing rather than lending facility funds and industrial loans." By limiting their exposure to short-term funding for imports and exports, the American banks have managed to, maintain high profits at very little risk. All of their loans are guaranteed by the Korean government.

One of the most influential banks in south Korea is the U.S. Export-Import Bank, which lends more money ii south Korea than in any other country - 6 percent of all Exim Bank loans By March 1981, Exim Bank had disbursed $3.6 billion to south Korea of which 70 percent was for .the construction of nuclear power plants. Exim Bank has also given financial guarantees totaling $0.5 billion to several U.S banks in Korea.

U.S. Corporate Investment

Though direct investment has been much smaller in dollar terms than loans in Korea, the impact of those investments has been enormous. By November 1980, Korea had received $1.1 billion in direct foreign investment. Of this total, Japan accounted for 52.9 percent, the U.S. 20 percent. U.S. investments are concentrated in such key sectors as petrochemicals, oil refining, fertilizers, automobiles, and in some small electrical machinery industries and chemical industries. Japanese investments are concentrated in textiles, electrical machinery, and hotels and tourism (many Japanese-financed products, however, are bought by U.S. retail chains such as Sears, J.C. Penney and K-Mart).

In the electrical sector, the principal U.S. investors are Motorola, Fairchild, Corning Glass, Komy Corporation and Tandy Corporation (Radio Shack). Most of their products are for export, and the investments are concentrated in the Free Export Zone at Masan. Aside from earning foreign exchange, these investments have had little effect on the Korean economy. To increase their rate of profit, the U.S. multinationals pay low wages-the average Korean worker earns barely $1.50 per hour-and there is virtually no transfer of technology or training in skills. Tandy Corporation reported in 1975 that its training period for assembly workers at Masan was one hour. Sixty percent of the workers these corporations employ are young women from rural areas.

Until 1980, three U.S. oil majors controlled both the refining and distribution of oil; they also dominated electricity production through their supply of fossil fuel for power generation. The largest of these companies was Gulf Oil, which had a 50 percent interest in the government-owned Korea Oil Company (KOCO) and operated south Korea's largest refinery., Gulf was also the major supplier of oil to the U.S. military in Korea. Under an agreement with the Park government, Gulf agreed to leave Korea after it had repatriated 150 percent of its original equity investment. By 1980 it had reached this point, with profits of over $136 million-but the company and the government are still locked in a bitter dispute over whether Gulf has fulfilled its promise. Gulf has withdrawn its profits and its personnel.

The other two foreign corporations in Korea's oil industry are Caltex and Union Oil. Caltex has a 50 percent interest in Honam Oil from an equity investment of $5.5 million as well as a $49 million loan. Honam Oil has a 32 percent share of the country's oil market. Union Oil has a 50 percent ($113 million equity investment) interest in Kyung-In Energy Company (which is also financed by $44 million of U.S. commercial bank loans) and this joint venture has an I 1 percent market share. ,

These companies import crude oil, produce petrochemical products (all marketed at monopoly prices) and distribute their gasoline through nation-wide chains of retail stations. A Korean newspaper reported in 1978 that the American control of management is so complete that "the Korean partners do not even know the purchasing price of crude oil, or have any control over purchasing."

In 1978 the Korean government announced a plan to build 44 nuclear power plants by the end of the 1990s. The rationale for this decision was to diversify the nation's sources of fuel so as to become less dependent on Arabian Gulf oil.

However, the plan has made south Korea even more dependent on the U.S. government-and on American multinationals and banks. U.S. involvement in the nuclear program has been pivotal since the 1950s, when Bechtel Corporation-the firm responsible for building 50 percent of all U.S. nuclear plants-trained 45 south Koreans at its California operations. Many of these men now hold key positions in south Korea's power industry, which is 100 percent owned by the government through the Korea Electric Company (KECO). (KECO, however, has debts payable abroad equal to 22 percent of its total assets.) Bechtel plays a major role in advising KECO on its plant bids and has been involved in designing and constructing several nuclear and coal plants.

The largest share of the nuclear. market is held by Westinghouse Corporation, which has supplied six of the nine Korean reactors (only one is in operation so far). The other three are supplied by CANDU of Canada and Framatome of France-which uses Westinghouse technology. General Electric sells turbines to the Korean nuclear industry.

Eighty-five percent of the capital for these U.S.-built nuclear plants comes from the U.S. Export-Import Bank; the rest comes from the Private Export Financing Company (PEFCO) and commercial banks. Despite the scaling down of Korea's nuclear plans (due to the recession and the rising costs of nuclear power worldwide) the U.S. nuclear industry is still promised a lucrative market for years to come.

American companies also have control over fertilizers, one of the largest industries in south Korea. Gulf Oil and International Mineral and Chemical Company each have 25 percent equity in Chinhae Chemical; Esmark and Skelly a 50 percent share in Youngnam Chemical; and Agrico Company a 25 percent interest in Namhae Fertilizer, which built the world's largest fertilizer plant in 1977. In 1977 the Asian Wall Street Journal reported that the Korean partners of these firms guaranteed a $2.6 million profit a year for 15 years to the Youngnam joint venture and $2 million a year to Chinhae. The amount of annual production and purchase was also specified in the original agreements.

One of the largest U.S. investors in south Korea is Dow Chemical Company, which owns 50 percent of. the Korea Pacific Chemical Corporation. Dow manufactures polyethylene and other chemicals for the agricultural sector at two mammoth plants in the southern industrial section of Korea. Dow has a government-sanctioned monopoly as supplier of chemical products in agriculture. It' also produces plastics and chemicals for export. However, in the last few years, the Korean domestic market has become saturated with Dow's products, while the export prices of its chemicals are too high to be sold on the world market (largely because of the rising cost of raw materials such as oil, and of semi-processed material inputs such as chemical feedstocks - all of which are imported). Because of agreements made with the government, however, Dow is compensated for the loss incurred in exports; these subsidies run into hundreds of millions of dollars a year, according to a U.S. Embassy commercial attache in Seoul. Dow is now asking for a reduction in power costs to increase its export competitiveness.

Both the plastics industry and the fertilizer industry have been granted monopoly selling rights by the Korean government. To increase rice production and to control the peasantry in the early 1970's, the government imposed centralized control on the agricultural sector or the "New Community Movement" and "The National Agricultural Cooperative Federation" (NACF). Korean farmers are required to purchase goods from the cooperatives, at prices much higher than those the cooperatives pay the companies. According to the Korean Catholic Farmers Association, fertilizer is sold to farmers at double the production costs; and farmers have over-used these fertilizers to increase production which has resulted in chemical poisoning to farm families as well as to dangerous levels of DDT, mercury, lead and copper being found in grain supplies throughout the country.

At the Ulsan and Yeochon industrial zones in southern Korea, where Dow Chemical and other U.S. multinationals have chemical plants, there has been serious pollution. The Samsoon plain, for example, an area north of Ulsan, was once a major rice-producing area. But in 1979, there was no harvest at all. According to a Korean scientist, "the farmers don't know what to do -nobody will buy their land because it is so polluted. [Government] compensation rates paid to farmers and fishing people [for pollution damage] are usually too low. The industrial companies often resist payment compensation as well." On February 24, 1981, the Korea Times announced that 90,000 farmers living in the vicinity of Ulsan "will change their residences soon in the first-ever massive evacuation forced by the worsening pollution situation." Government critics told this author that it is likely that this extraordinary evacuation plan will never be implemented.

As South Korean agriculture has stagnated, U.S. grain corporations have profited handsomely from exporting American surplus wheat, rice and corn. Cargill and Continental Grain are both major grain sellers to south Korea; Cargill also has a joint venture in the Korean poultry industry.

The automobile industry, overcapitalized in the 1970s, was forcibly reorganized by the Chun government last summer. Ordered to merge were Hyundai Motors (a joint venture between Korean owners and Mitsubishi of Japan) and Saehan Motors, 50 pe-rcent owned by General Motors (which has an equity investment of $26.8 million). In March 1981, however, the government had to change its order because GM demanded a 50 percent share of the proposed company, and threatened to disinvest if the reorganization went through. The result: two auto companies will now be competing in south Korea's small domestic market, Hyundai with its "Pony," GM with its "world car." Thus south Korean cab companies and wealthy consumers will subsidize the U.S. multinational since domestic car prices are more than double export prices for the same car.

Military spending in south Korea amounts to some 30 percent of the government budget. Several U.S. multinationals have assisted Korean firms in manufacturing military equipment. In the last year, agreements have been reached to allow co-production of F-4 jet fighters in south Korea. The partners will be Northrop Corporation, United Technologies and Korean Air Lines. At a recent meeting of the U.S. and south Korean defense ministers held in San Francisco, the U.S. announced it will "approve the sale to other nations of six of 31 kinds of defense equipment manufactured in Korea under U.S. licenses."

But the impact of U.S. multinationals is greater than their economic power. U.S. corporations have publicly supported the dictatorships of both Park Chung Hee and Chun Doo Hwan. Gulf Oil and Caltex admitted to paying Park over $7 million in his campaign for the presidency in 1971, when he barely defeated opposition leader Kim Dae Jung. GM admitted a $250,000 payment. When the U.S. Congress was (timidly) investigating the Koreagate scandal in 1978, several U.S. wheat executives issued a statement supporting Park and asking that the U.S. end its probe for fear that "U.S. markets are threatened."

In January 1981, Westinghouse bought full-page advertisements in the New York Times and the Washington Post praising Chun Doo Hwan's visit to the U.S.

South Korea Under Chun Doo Hwan

In a series of "reforms" last summer, the Chun government announced a free market policy designed to take the government out of the decision-making process-it then attempted to consolidate heavy industries such as automobiles and turbine generators which had over-extended themselves and were running at very low capacity; announced an anti-monopoly policy; and purged the bureaucracy of those it deemed "corrupt" or "politically impure."

The government has launched a campaign to convince workers that it was their wage increases in the mid-1970s which fueled inflation and caused South Korea to lose its export competitiveness. This year it is holding wage increases to 15 percent, despite a predicted 30 percent hike in living costs.

It has also moved to dismantle the labor movement by purging militants, reorganizing the Federation of Korean Trade Unions so only local unions have the power to represent workers, and instituting a series of labor-management committees to take the place of collective bargaining. As one Korean human rights activist told this writer this spring, "the labor movement has been destroyed." (See accompanying story.)

The Chun government has also announced new policies on foreign investment, allowing 100 percent ownership in domestic industries, permitting foreign, banks to open branches which service domestic clients rather than only the export industries as was previously the case (the first one was opened recently by Bank of America), and lowering interest rates for export industries.

This drive to open South Korea to further foreign-especially American-investment appears to be a concession by the Chun government to the U.S. For Chun, the investments ensure U.S. military support,[1] for U.S. business Chun's policies ensure a continuing market for nuclear reactors, surplus food and other sophisticated high-priced manufactured goods, and profitable site for investments in such areas as pharmaceuticals and food processing. In effect, to resolve the problems caused by the export economy, south Korea is becoming more dependent on U.S. firms by encouraging them to invest in domestic as well as export industries.

But despite the changes in regulations, few foreign investors are returning to south Korea, and financial experts are expressing gloom over south Korea's prospects. A recent Chase Econometrics 10-year forecast for Korea stated that "high inflation will continue but will slacken off, as south Korea pays the price for overreaching in its energy-intensive industrial development. Export growth will drop sharply, pulling down overall economic growth." In a recent survey of 86 major Japanese companies with overseas operations in Asia, south Korea was rated as the "least desirable" place for new investment among nine Asian nations. In the first three months of 1981, few new applications for foreign investment were received in south Korea, and only $3.5 million of investment were approved; in the previous five years, approvals averaged $114 million a year.

The major reason for the lack of new investment seems to be corporate dissatisfaction with the way the government is handling the economy. One U.S. Embassy official said that the most serious concern for U.S. investors was the "conflicting signals within the Korean government about foreign investment." "The problems for foreign investors are still severe," he said. "They have to allow freer regulations. They have to stop the harassment of multinational corporations."

What U.S. officials and corporations are alarmed about are the recent actions of the Korean government against several multinational corporations, such as the tax imposed on Gulf Oil and the attempted forced merger of GM and Hyundai (there were also a few stories critical of GM's attitude towards Korea in the government-controlled press). "Koreans are overlooking that these rules do nothing to increase investor confidence," said a U.S. Embassy official in Seoul. "There are also problems with import regulations. Many narrow-minded people are trying to force bureaucratic rules on companies." One U.S. business representative in Seoul attacked the Korean protectionist attitude, a tendency - he termed "absolutely inimicable to American interests." The bureaucratic tendency," he said, "is to screw the foreigner."

Thus, while U.S. multinational corporations have been welcomed into south Korea for over 20 years, and given the chance for enormous profits and large market shares, not all Koreans are happy with the situation. Tensions within the Korean government itself are rising over the increasingly dependent relationship with the U.S.-not to mention the resentment over the manner in which Chun took power.

While Chun Doo Hwan and his loyal followers in business and the government need U.S. support to maintain their own power, the resistance to U.S. investments and market domination indicate a developing economic nationalism in south Korea. These feelings cannot I be expressed publicly because of the political and military relationship with the U.S., but if the economy continues to deteriorate and American companies profit at the expense of Korean business through buy-outs of bankrupt companies and increased investment in the domestic market, open conflict could develop.

The combined student, worker and Christian opposition movement is already critical of U.S. multinationals and south Korean dependence on the U.S. and Japan. If these forces started making alliances with nationalist-leaning people in the government, the military or in business, to oppose foreign domination of south Korea, the political struggle would once again become critical. This was beginning to happen shortly before Park was assassinated. It happened in the spring of 1980-until the movement was put down by Chun Doo Hwan with the acquiescence of the U.S. military commander, who controls 85 percent of all U.S. and south Korean forces. Should a popular rebellion occur again, what remains of what has often been described as South Korea's "economic miracle" could be one of the victims.


FOOTNOTE:
1 Chun backed GM in its bid to maintain 50 percent control over the Korean auto industry. Asked by Business Week magazine why this was so, an unidentified American corporate executive replied: "It's good politics. It not only brings in more capital, but it also increases the pressure on Washington to maintain U.S. troops in South Korea. If Congress starts talking about pulling back troops, companies like mine are going to raise a lot of hell."


Tim Shorrock is a researcher with Nautilus International, a San Francisco-based public interest group researching the political economy of the Asia-Pacific area. Shorrock recently spent five weeks in south Korea.


Some Facts About Working Life in South Korea

Forty percent of workers in mining and manufacturing earn less than the monthly average of 100,000 won ($U.S. 151).

Under President Chun's new labor laws, only company-controlled unions are allowed.

Intimidation of workers is extreme - dissidents can be sent to government-sponsored "Saemaul (New Village) Camp" for "reeducation" and "purification training."

Workers guilty of lesser infractions are likely to be blacklisted off the job market, or transferred to another corporation at another location.

All civilians are subject to seven years in prison for attending unauthorized meetings anywhere, including in private homes.

The number of officials who are employed full time in representing workers is strictly limited: for instance, a workforce of between 300 and 1,000 is allowed one full time union official.

No unions at all are permitted in government-run enterprises.


In Search of the Cheapest Calculator´┐Ż

South Korea's cheap labor might not be cheap enough for multinational electronics firms. More than 150 foreign-owned electronic companies employ over 100,000 Koreans and account for some 60 percent of South Korea's electronics exports - but foreign investors, particularly the rapidly-growing semiconductor assemblers, are choosing to expand elsewhere in Asia. Motorola, the largest foreign electronics firm in South Korea, recently announced plans to erect a plat in Sri Lanka's Export Production Zone (EPZ) near Colombo. Fairchild Semiconductor (now owned by Schlumberger), the first U.S. circuit maker to establish plants in Asia in the early 1960s, started up production last year in the Philippines.

The reason is simple: although semiconductor assemblers are not paid enough to keep up with South Korea's skyrocketing cost of living, over all labor costs in the country are almost three times as high as in the Philippines, the new center for electronics assembly in east Asia. Korean labor costs, including fringe benefits, are about $U.S. 1.75 per hour. Trade magazine Semiconductor International cites a Philippine electronics executive, Arturo Carlos; "Politics in Korea are causing some companies to move from that country. The Philippines, however, is still a good labor market at 60 cents an hour."

- Pacific Studies Center


How "Development" Has Distorted S. Korea's Economy

Since the mid-1960s, south Korea has had an economy oriented towards exporting. Its primary markets are Japan and the U.S., which respectively took 70 percent and 26.2 percent of south Korean exports in 1980. The country is the twelfth largest trading partner of the U.S.; in 1980 U.S.-Korea trade amounted to $9.47 billion.

The rapid growth of south Korea's production output (averaging 10 percent a year between 1962 and 1978) was achieved by attracting foreign capital through tax incentives and low wages, channeling investments into export industries, and neglecting the domestic market-particularly the agricultural sector. By 1981 south Korea's aggregate public and private debt had reached $26 billion.

In the initial stages of south Korea's economic growth, the stress was on light industry: plywood, textiles and electronics. But in the early 1970s the government decided to shift towards heavy industry. Huge investments were made in steel, petrochemicals, automobiles, machinery and shipbuilding. These industries were both capital- and energy-intensive; their growth was predicated on the low cost of oil from the Middle East, and continued economic growth in the advanced capitalist countries.

The structure of south Korea's economy has several peculiarities:

  • A permanent dependence on overseas trade and markets. South Korea's combined percentage of exports and imports relative to its GNP rose from 18.8 percent in 1962 to 79.2 percent in 1977 (compared to 25 percent for Japan). This makes south Korea extremely vulnerable to recessions and currency fluctuations.

    But the plans did not change after the 1973 oil crisis and the 1974-5 world recession. By the time of the 1978 oil price hikes, the south Korean economy was showing signs of stress. Worldwide inflation was causing rises in raw material prices and in Korean wages, which hurt the country's competitiveness in world markets. The recession and rising protectionism in the Western nations were also hurting Korea's exports. Preferential loans given to heavy industry and the export sector had caused serious capital shortages in domestic industries, causing several thousand bankruptcies and growing unemployment. The heavy industries themselves were running at very low capacity. In 1980 south Korea experienced its first minus growth rate (-5.7 percent) in 20 years, and inflation had reached, nearly 50 percent.

  • A perennial trade deficit and a dependency on imports. The Korean industrial structure is characterized by the export of simply processed goods depending on imported raw materials. Fuel, raw materials and capital goods accounted for 89.6 percent of total imports in 1978; raw materials for export-processing accounted for 30 percent of total imports. With the development of heavy and chemical industries in the late 1970s, the introduction of both technology and raw materials has increased (in shipbuilding, for example, only hulls are produced in Korea; all the machinery, engines and instruments are imported from Japan). In 1978, 83 percent of south Korea's trade deficit was with Japan, amounting to $3.3 billion. In 1980, it had a$290 million deficit with the U.S. 9 A dual economy. Besides creating a dependence on imports, the channelling of investments and foreign capital into the export sector has resulted in a dual economy. The foreign sector is almost completely severed from the domestic structure, domestic industries do not supply raw materials, machinery or semifinished goods to the export sector and export industries supply very few goods to the domestic market.

  • High inflation. The combination of foreign capital imports, high defense spending (6 percent of GNP) and rising oil and raw material prices has resulted in inflation rates approaching 50% a year.

  • Structuralized low wages and low food prices. Promotion of exports has meant that wages and food prices have been kept artificially low to maintain international competitiveness. Low food prices have been achieved largely through importing U.S. surplus grain, causing the stagnation of the agricultural sector and adding to the trade deficit. The low wage structure has been maintained through some of the most strict controls on labor activities in the industrialized world.

  • A "statist" economy. In 1978 the World Bank described the government role in south Korea as considerably more direct than that of merely setting up the broad rules of the game and influencing the economy indirectly through market forces. In fact the government seems to be a participant and often the determining influence in nearly all business decisions.

Korean companies compete among themselves for government loans and favors rather than in the marketplace. This has several effects: since so many decisions are made politically, there is little incentive to rationalize or economize production. When-large companies-especially export-oriented companies-find themselves in difficulty because they have been unable to keep up with rising raw material costs or because of financial mismanagement, the government has usually subsidized them or provided loans to avoid bankruptcies. Companies cut costs by suppressing wages and by further cutting costs by measures such as reducing workplace safety measures. A third effect is massive corruption and waste. Bribery of officials to obtain these government favors became common. Many export companies in the 1970s used their "cheap" loans (at rates less than half the domestic interest rate) to invest in real estate or speculate, which has led the Chun government to establish a real estate inventory and to attempt to control speculation.

- T.S.


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