Survival of fittest becomes survival of fattest

There’s often an inverse relationship between the number of journalists attending an event and the amount of news produced.

Rather than join the army of scribes in Pittsburgh for last week’s Group of 20 meeting, visit Seoul to take the pulse of one of the group’s most intriguing economies. The prognosis? Good, considering that just a year ago markets buzzed about South Korea becoming the next Iceland.

Asia’s fourth-biggest economy faces daunting risks, not the least of which is its high reliance on exports amid scant world demand. Some time spent with officials such as Hur Kyung-Wook reminds you how much potential remains in the fastest-growing economic region. It also shows how much economies such as the US’s can learn from far smaller ones like Korea.

“The economy is rebounding quite nicely,” says Hur, first vice minister of strategy and finance. “Korea has been able to ride this financial roller coaster more nimbly than others.”

It continues to confound the pessimists. Korea avoided the foreign-currency debt crisis that many predicted following the collapse of Lehman Brothers a year ago. Now, economists are betting that the Bank of Korea will be raising interest rates early next year as growth stabilises.

Korea’s real contribution within the G-20 is how it handled the 1997 Asian crisis. The so-called moral hazard that tends to result from governments providing support during financial meltdowns isn’t being addressed seriously. The events of the last 12 months have even left executives in the US and Europe with greater incentive to get bigger.

“There’s a benefit to being too interconnected to fail, and this is something Korea, from its history, knows something about,” Hur says. “It’s the survival of the fattest, not the fittest that we are seeing today.”

Korea fought this Darwinism in reverse by letting companies and banks fail. Granted, Korea’s implosion didn’t threaten the global economy to the extent the US’s did. Also, many say letting Lehman Brothers fail was a grave mistake that added fuel to an already raging fire.

A year after Lehman’s fall, though, US regulators have yet to rein in an oversized and rickety system that almost dragged the entire economy down with it. The profits that Goldman Sachs is generating shows the extent to which Wall Street is returning to business as usual. The trouble is that policy makers have yet to address the causes of the crisis.

Massive stimulus packages treated the symptoms, not the underlying illness. If companies such as American International Group understand they need to operate more responsibly, they aren’t letting on. Why wouldn’t Citigroup take on massive risks when it assumes the US taxpayer will bail it out? There’s every reason to speculate if you will still be paid hugely for short-term gains without long-term accountability.

Like the US of recent years, Asia had reckless lending, investment and liquidity spilling over into the economy.

Also, Korea experienced four things with which the US is currently dealing: denial, waning investor confidence, dangerously low interest rates and the risk that moral hazard would encourage irresponsible behaviour.

Korea’s post-crisis handiwork was far from perfect. The economy is still lopsided toward exports, not enough toward the service industry. Yet it let more than a dozen conglomerates fail 12 years ago and made clear there was a limit to government assistance. Executives that helped push Korea’s economy to the precipice were fired.

The resulting shakeout was painful, as Koreans are quick to explain. I remember wandering around parks in Seoul in 1997 and 1998 and seeing out-of-work men in business suits. Rather than admit to their families they had been fired, they would leave home with their briefcases and cool their heels on park benches.

Korea is better off for that pain. Far from ideal, mind you.

Yet Hyundai Motor is an apt metaphor for Korea’s recent experience. Less than a decade ago, its vehicles were a punch line, widely dismissed as inferior. Now, it’s Asia’s best- performing major carmaker. At a time when General Motors is bleeding, Hyundai’s global market share reached a record five percent in the January-June period.

The US, meanwhile, is relying on short-term fixes such as low interest rates and government largess. Policy makers have been reluctant to act boldly or provide guidelines to restore calm to Wall Street. Liquidity is fine when the global economy is crashing. It’s not the answer to what ails markets.

Korea learned more than a decade ago that banks need to disclose their true position in credit markets, write down losses immediately and shore up capital bases as fast as possible. If public money is used to stabilise things, it’s best to do it sooner rather than later.

Concerns that we may get a ‘W-shaped’ recovery are imperiling confidence in the US financial system. Investors can’t be sure that banks can handle the stress of renewed financial turmoil. For lenders, it’s a good time to be fat rather than fit. Talk about an unhealthy environment.

William Pesek is a Bloomberg News columnist. The opinions expressed are his own.

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