Tuesday, October 25, 2016

Constitutional Reform is a Good Idea that Likely Won’t Happen

In a surprising political move that reeks of desperation, President Park Geun-hye dropped a political bombshell yesterday when she called for scrapping the single five-year term limit that has been placed on the presidency since 1987.

Seeing how President Park is currently embroiled in a scandal involving Choi Soon-sil, one of her close confidants, over accusations of corruption and power-peddling, which in turn has also widened the investigation to include Ahn Chong-bum, President Park’s chief policy aide, it was widely expected that either the Blue House or members of the pro-Park faction of the ruling Saenuri Party would do something to distract people from the latest round of scandals.

When former Foreign Minister Song Min-soon mentioned in his memoir, A Glacier Inevitably Moves, that Moon Jae-in -- who was the late President Roh Moo-hyun’s chief-of staff -- had given the green light in 2007 to ask Pyongyang for its opinion on the U.N. resolution on North Korean human rights violations, this was widely thought to be the political issue that President Park and Saenuri lawmakers would use to beat the opposition to death.

It was the perfect bludgeon. Whether one cares to admit it or not, it is extremely difficult to interpret Moon’s actions as anything else other than collaborating with the enemy -- Sunshine or no Sunshine. Furthermore, Moon has still not yet denied the allegation, which has only added fuel to the fire. If they had beat this drum loudly and for long enough, for good or for ill, it would have likely drowned out what is being dubbed by the Korean media as Choisoonsil-gate.

So it was a shock when President Park gave her formal endorsement for revising the Constitution. After all, when a proposal was made early last year to amend the Constitution -- and one of the proposals was to change the president's single five-year term to a four-year term with the possibility of reelection -- President Park opposed it under no uncertain terms. She said that attempting to amend the Constitution would have been akin to “a black hole” for other pending issues.

Speaking of black holes...
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And she was right. Revising the Constitution requires significant political capital and everything else -- deregulation, tax cuts, decentralization, welfare programs, foreign policy, international trade agreements, alliance management -- would have been placed on the backseat. Revising the Constitution would have been extremely difficult when her approval ratings were still high during the early days of her administration. Now that her approval ratings are at an all-time low, if she does go through with this, it’s possible that she will be wrestling with this until her last day in office and still fail to get anything done.

This was a 180-degree turn and it reeks of desperation. Even if there were enough political capital to push this through, the political payout would be insignificant. At least for President Park.

Considering South Korea’s history of authoritarian leaders who amended the Constitution to allow them to rule indefinitely, President Park’s own father being one of them -- South Korea’s Constitution has been amended a total of ten times within its relatively short history -- it made perfect sense when it was agreed that the power of the president would be greatly curtailed, though imperfectly. Although the single five-year term was certainly an improvement over the past, the fact that the president still gets to appoint and dismiss members of the Cabinet means that too much political power is still concentrated in the hands of the president.

There are four specific amendments in the Republic of Korea Constitution that are aimed specifically at curtailing the power of the president. 

Article 70:
The term of office of the President shall be five years, and the President shall not be reelected.

Article 128, Section 2:
Amendments to the Constitution for the extension of the term of office of the President or for a change allowing for the reelection of the President shall not be effective for the President in office at the time of the proposal for such amendments to the Constitution.

Article 130, Section 1:
The National Assembly shall decide upon the proposed amendments within sixty days of the public announcement, and passage by the National Assembly shall require the concurrent vote of two thirds or more of the total members of the National Assembly.

Article 130, Section 2:
The proposed amendments to the Constitution shall be submitted to a national referendum not later than thirty days after passage by the National Assembly, and shall be determined by more than one half of all votes cast by more than one half of voters eligible to vote in elections for members of the National Assembly.

After having been ruled by authoritarian leaders for far too long, ironclad safeguards had been built into the Constitution to ensure that no other president could amass dictatorial powers. Not even Park Geun-hye. Short of commanding the military, which was largely defanged by the late President Kim Young-sam (so there goes that option!), to use violence against the National Assembly and against the South Korean people (and the U.S. would just love that!), there simply is no easy way to amend the Constitution -- especially not when the proposed amendment is so contentious.

A simple cost-benefit analysis of amending the Constitution clearly shows that the costs outweigh the benefits. At least if the benefits are strictly limited to what President Park might be able to enjoy in the short term, rather than the nation as a whole over the long term. And there are many serious reasons to doubt any politician’s commitment to altruism.

For reference, please, read F.A. Hayek’s Why the Worst Get on Top
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So it is likely that all this noise being made about amending the Constitution is simply hot air whose sole purpose is to distract people from the scandals that are surrounding President Park. As soon as the scandal is largely forgotten, it’s more than plausible that all this talk about constitutional revision will be shelved just as quickly.

We have to be clear that there are certainly benefits to allowing the president to seek re-election (though anything more than two terms would be met with significant political opposition). In reality, a single five-year term means that the president actually serves a single four-year term because, unsurprisingly, incumbents become lame ducks in their final year. After all, while the president gets to contemplate retirement (and hope not to be jailed by his/her successor), everyone else is understandably focused on who will be the next president.

The president’s time in office is shortened even further when one considers institutional inertia that always greets a new president. For lifelong politicians like Kim Dae-jung and Kim Young-sam, it was relatively easy for them to fill in government positions with people they knew were loyal to them. But for newly elected presidents who have not spent their lives in politics (or in Park Geun-hye’s case, came from politics but mostly as a “legacy”), a president without political connections is at a disadvantage. Case in point, though it seems like a lifetime ago now, there was a time early in President Park’s administration when she had trouble filling ministerial positions because of political opposition.

Needless to say, the biggest challenge that the single five-year term poses is the lack of continuity and policy effectiveness. Policies ranging from economic matters such as reining in the chaebol to North Korea policy have changed from administration to administration. More time is needed for government policies to bear fruit. If the policies prove to be valuable and effective, successive presidents will be more likely to continue and honor those policies, regardless of which parties the presidents hail from. It would ensure that partisanship would get tempered once an individual is elected president.

Whether the policies are rational or not and whether the results of the policies would be sweet or bitter are a different, albeit related, subject. But without continuity, a nation’s slogans about long-term goals would be just that -- slogans and nothing more. And Korea is full of buried slogans.

Seeing what has happened to Uber and what will happen to Airbnb, I am still not clear as to what “creative economy” means
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Perhaps the most compelling reason to allow presidents to seek reelection is the most cliché of them all. Korea is a divided country and whether it is the result of deliberate action or gross miscalculation or sheer bad luck, the specter of war cannot be taken for granted. In times of national crisis, continuity and experience can be vital. There is a reason Franklin Delano Roosevelt was elected to a fourth term during the Second World War.

There are many good reasons to support a constitutional revision. It’s a shame that President Park appears to be using the possibility of constitutional revision for something as frivolous as a shield against political scandal. This is a discussion that ought to be given serious and sober thought, but President Park’s seemingly careless disregard for it could rob the country of desperately needed reform.

Tuesday, October 18, 2016

Samsung (and other Chaebols) has to Embrace the Future

Fairly or unfairly, South Korea, whose official name is the Republic of Korea, is often pejoratively called the Republic of Samsung. However, seeing how Samsung Group generates up to 20% of South Korea’s GDP, that name may not be entirely inaccurate.

As such, when Elliott Management, a US-based hedge fund management group, made its first serious attempt at shaking up Samsung Group last year, things were expected to get ugly. After all, South Korea
s economic fate is inextricably tied with Samsung’s fate. Essentially, Elliott Management opposed the US$8 billion merger of two of Samsung Group’s companies - Samsung C&T Corp and Cheil - because it believed that Cheil’s offer was too low and that there was not much evidence for Samsung Group’s “aggressive” claims that the merger would be profitable in a few short years.

For its part, Samsung stated that it needed the merger to streamline its corporate structure and to eliminate redundancies in order to cut unnecessary costs. Also, Samsung needed the merger to take place because it would have given Lee Jay-yong, the still current heir to Samsung’s chairmanship, more control over the company.

Things got uglier than anticipated. So much so that the language used in some Korean media outlets took on severely anti-Semitic tones. The decision whether to accept or reject the merger deal was pitted as one between a besieged group of noble Koreans (sound familiar?) fending off foreign vultures, specifically Jewish ones, whose sole purpose is to devour weak companies for all the money that they are worth and to leave them (and the countries that depend on those companies) to rot.

Samsung Group narrowly won that vote by 3%. For its part, Elliott Management demanded that Samsung C&T buyout its stake in the company. It was never publicly revealed how much Elliott Management was compensated.

It was assumed that that was that but more than a year later, Elliott Management seems to be ready to face off against Samsung a second time.

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After a series of explosions, recalls, continued explosions, and worldwide derision, Samsung Electronics finally decided to discontinue the Galaxy Note 7. The timing couldn’t have been worse. There are already signs that the international smartphone market is sputtering and increased competition from Chinese smartphone manufacturers are threatening the dominance once enjoyed by Samsung and Apple. The cost of recalling the troubled phones alone is estimated to exceed US$5 billion; not to mention the incalculable cost of tarnishing one’s reputation. Furthermore, considering how Samsung is still embroiled in a series of billion-dollar-lawsuits with Apple, the Galaxy Note 7 debacle couldn’t have come at a worse time.

Enter (or re-enter) Elliott Management.

Sensing an opportunity to strike while the iron is still hot, Elliott Management once again voiced its desire to see a shakeup in Samsung’s governance structure. Having learned from its previous bout with Samsung, Elliott Management appears to have put aside its brash demeanor and penned a relatively gentle proposal letter which would most likely be welcomed by both Korean and foreign shareholders and stakeholders for their own reasons.

Elliott Management
’s biggest four proposals are:

  • Split Samsung Electronics from Samsung’s wider corporate holdings.
  • List the newly-split Samsung Electronics on public stock markets such as the Nasdaq Stock Exchange.
  • Commit Samsung Electronics to a US$27 billion stock buyback program and, in line with international corporate standards, return 75% of its annual free cash flow to investors.
  • Improve transparency in Samsung Electronics’ corporate governance by adding three independent directors to its board.

The third proposal is likely to be met with approval by both Korean and foreign shareholders (and likely tacit approval by the Korean government for the stimulative effects it would have on the overall Korean economy) considering the fact that Samsung Electronics’ cash reserves is estimated to be around US$70 billion, a sum that Elliott Management and many others classify as being “significantly overcapitalized.”

For its own reasons, however, aside from splitting Samsung Electronics from Samsung’s wider corporate holdings, Samsung will most likely not at all consider Elliott Management’s other three proposals.

Perhaps as a result of Elliott Management’s toned down proposal, the Korean media’s defense of Samsung has not taken on the ugly anti-Semitic tone that some took up last year. However, that is not to say that the Korean media has abandoned its nativist strategy to defend Samsung; and the unintended (or perhaps intended) side effect of such a defense strategy may be to prevent Korean investors from seriously considering the possible benefits of Elliott Management’s proposals.

Case in point, a few days ago, Hankyung (aka The Korea Economic Daily), one of the most respected business/economics news outlets in Korea, penned an editorial about Elliott Management’s proposal. After stating what the four main proposals were, the editorial went on to excoriate 
foreign corporate raiders that seek to maximize short-term returns for shareholders (namely themselves) at the expense of sustainable growth for the businesses they descend upon. The editorial then goes on to say that the Korean government needs to help Korean corporations to defend themselves from “the wolves” and one of the best ways of doing so would be to allow Korean corporations to issue Differential Voting Right (DVR) shares.

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Typically, DVR shares are traded in the same way as ordinary equity shares except these provide fewer voting rights to the holder. Investors who purchase these types of DVR shares tend to be passive investors who are not much interested in the decision making process but are merely interested in financial gains i.e. the exact opposite of activist shareholders. Consequently these types of DVR shares are usually traded at a discount and may offer higher dividends to shareholders who choose to purchase them in exchange for accepting highly weakened voting rights.

DVR shares with higher voting rights can also be simultaneously issued by a company’s promoters to themselves or their own family members. This is done to increase their control in the company’s decision making process, which would of course be in excess of their financial holding of the company. Therefore, the sale of DVR shares to 
“outsiders would not weaken the promoters’ voting rights and would also make hostile takeovers difficult to achieve, if not outright impossible.

Currently, Korea’s Commerce Law prohibits the issuance of DVR shares.

The problem with such editorials is that they keep Korean investors and shareholders in the dark about the benefits that are being proposed by these “foreign vultures.” To explain, they don’t explain why Elliott Management wants to see Samsung Electronics split from the parent company or the events that led to such a proposal to be made. It also doesn’t bother to do anything more than simply mention in passing that one of Elliott Management’s proposals is to have Samsung Electronics publicly listed on the Nasdaq Stock Exchange, which would subsequently help to significantly raise Samsung Electronics’ market value - not unlike what happened for Alibaba.

It goes without saying that being publicly listed and traded in international stock markets would certainly pose a challenge for the existing management teams and the systems that they have in place. After all, publicly traded businesses face extra scrutiny from investors, regulators, and the media from all over the world. That is to be expected once they begin to play on a much larger stage. Once publicly listed, Samsung Electronics would no longer be able to rely on a fawning local media or local regulators who may (or may not) have conflicts of interests with Samsung Electronics. In other words, international exchange markets, whether those in New York or Hong Kong would further be able to help to steer Samsung Electronics’ governance and corporate structure into a more internationally respectable one.

Especially important for international investors is that such a public listing would significantly streamline the investment and share-buying process. Currently, due to Samsung’s refusal to be publicly listed and traded, international investors need to jump through a series of hoops just to be able to buy a basket of Korean companies’ shares - only some of which is actually Samsung’s shares. In fact, Samsung has dedicated an entire page on its website - full of bullet points, tables, charts, and legal disclaimers - to help international investors purchase Samsung’s stocks.

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Of course, the problem is that the chaebols’ main priority is not having their stock indexes properly evaluated, but rather to maintain the control they have over their own business empires. The reasons are simple. The first and most obvious reason is that they have been able to retain control over their own businesses and they have no desire to lose that. The second (and related) reason is that not being publicly traded in international exchange markets has meant that chaebols have been able to exploit cross-shareholding for many years.

So what is cross-shareholding? Cross-shareholding is a practice that has often been used by chaebol chairmen and their family members with the sole purpose of securing their control over their business empires with just a handful of shares.

For example, when Company A makes an equity investment in Company B, which in turn buys a stake in Company C, which in turn secures a stake in Company A, a cross-ownership loop is created. This is what allows chaebol owners to have control over their business empires with just a handful of shares. It is also the very thing that has allowed chaebol families to facilitate father-to-son transfers of corporate control - something that would be anathema in Western markets.

An added benefit of cross-shareholding for Samsung’s owners and family members is that even if one of their subsidiaries loses money, Samsung Group can use the profits that have been generated by another subsidiary to cover the costs. Using this method, Samsung Group can undervalue their stocks, which is one of the key reasons for Korean corporations being so notorious for their relatively low dividend yields.

Yes, laws have been passed and the Korean government has put political pressure on the chaebols to ban new cross-shareholding investments (though not existing ones) but some practices take a long time to die out. As far as Samsung or the other chaebols are concerned, they have little incentive to take Elliott Management’s proposals seriously. They’re at the top of the world. Why would they give that up?

Decisions of this nature will always carry costs and benefits. The costs to the chaebols are obvious. They and their families would lose the iron grip they have over their businesses, jeopardize hereditary successions, and they would be at the mercy of extremely strict and demanding foreign investors and regulators. In short, they would their Shangri-La.

However, nothing lasts forever. Not even the joys of paradise. Economic uncertainty in Europe, modest job growth in the United States, and China’s economic slowdown and looming banking crisis have all significantly weakened external demand. Korean businesses have long complained that militant unions have long dissuaded foreign investors from investing in Korea and though that is true, that claim masks the role that low dividend yields have played in doing the same thing. Domestic consumption remains sluggish and further attempts to stimulate the economy via quantitative easing could inadvertently exacerbate household debts. Korea’s low rates of immigration combined with an aging population who will also have to someday face a real estate bust threaten economic contraction.

All indicators, from the short-term to long-term, are pointing to economic gloom and doom. And Korea is quickly running out of options and time to cushion the blow. The massive cash reserves that Samsung and other chaebols are holding on to may help them to weather economic recessions and survive where Hanjin failed to do so. However, a siege mentality is bound to fail over an extended period of time.

Samsung and other chaebol companies have a choice to make - adopt Elliott Management’s proposals (or at least some of them) while they are still gentle proposals and thus launch Korean corporations into the 21st century and compete with the rest of the world on an even footing and help to expand markets, both domestically and internationally, or someday be made to adopt them a la IMF diktats circa 1997~1998 when they were anything but gentle.

Choose wisely
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Thursday, October 13, 2016

Private Think Tanks Are NOT Ruining Policy-Making in South Korea

Yesterday, Emanuel Pastreich published a column/op-ed in Korea Exposé, which was titled “Tanks of Destruction: Private Think Tanks Are Ruining Policy-Making in South Korea.”

I don’t know if Pastreich came up with the title himself, or if it was created by the site’s editor and founder, Se-Woong Koo. Either way, it was a catchy title and it caught my attention. And not for the first time, I disagreed with yet another op-ed that was posted on that website.

Basically, Pastreich’s point was that a lot of think tanks in Korea, particularly the mainstream ones, are not worthy of the prestige they possess. The following are a summary of Pastreich’s main complaints regarding think tanks:
  • Much of the content produced by think tanks are banal, dishonest, superficial and ritualistic.
  • Think tanks are ranked according to the amount of funding received, but such funding means they are not independent as think tanks cannot risk upsetting their patrons.
  • Think tanks are not accessible to the public and they represent the interests of a small group who fund the think tanks.
  • Think tanks seek to privatize the work that should be carried out by a government official, a staff member of a government research institute or a professor at a university and set long-term national agenda. But think tanks’ purposes are short-terms gains.
Rubbish Thinking
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One could say that Pastreich may be throwing stones while living in a glass house. After all, he is the director of The Asia Institute, which is also a think tank. However, I must confess that I am not at all familiar with The Asia Institute or the work that it has produced. So that’s neither here nor there.

Regardless of that fact, however, the fact that he is the director of a different think tank and the other think tanks that he excoriated are basically his competitors is, I think, the weakest rebuttal that can be summoned against Pastreich’s points.

My first point of contention after reading Pastreich’s op-ed was that think tanks are supposed to be exclusive. They are supposed to represent the opinions, thoughts, and research by the elites who have spent a long time studying those subjects they pontificate on.

Back in early 2014, right about the time when Ahn Cheol-soo had just started to seriously begin his foray into politics, one of the first things he did was to establish his own think tank - the oddly-named Policy Network Tomorrow (정책네트워크 내일). I looked at his think tank’s mission statement and it sounded a lot like the kind of think tank that Pastreich is looking for (at least in think tanks that he is not a part of) - a think tank that is accessible to the public and one that doesn’t put too much focus on the “banal and dishonest” experts, but rather, in the words of Policy Network Tomorrow, on “the problems that the people face in their lives.”

I wrote about Ahn Cheol-soo’s think tank before and the unfortunate reality seems to be that if Pastreich’s suggestions regarding accessibility is given serious consideration, it would lead to think tanks that don’t do a lot of thinking.

Pastreich is not wrong when he argued that the opinions and research data that think tanks advocate can be (and often are) hijacked by people with vested interests. That is not in dispute. But the notion that think tanks are supposed to be open to the public or somehow responsive to what the public thinks is wrong. For one thing, all you need to do is speak to one of the unwashed masses who has never thought much about a given topic to know that you shouldn't pay attention to everyone. After all, the direct result of paying too much attention to the opinions of the masses is the rise of Donald Trump!

Besides, if we are looking for people who will better reflect the wishes of the public, those people already exist. They
re called elected officials. I wont hold my breath waiting for people to shower them with glory and praise.

Obligatory mention of the fact that he also said “Democracy is the worst form of government, except for all the others.
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Another point that I strongly disagreed with Pastreich was his opinion that massive corporate funding makes a think tank less trustworthy and reliable.

There was a think tank that I really liked. It was Freedom Factory, a libertarian think tank that advocated limited government and free market solutions to many of society’s ills.

(Disclaimer: I was never formally employed by Freedom Factory, but I did a number of freelance work for them - mostly Korean-to-English translation services. I also edited their English-language biweekly online news magazine, Freedom Voice.)

Did you notice the use of past tense? That
s because Freedom Factory went out of business a couple of months ago. I recognize that “capitalism” is often used as an epithet and there are even fewer fans of libertarianism. So I understand that some of you may disagree with what Freedom Factory stood for and argue til youre blue in the face that it was evil or throw whatever epithets you can think of. I won’t argue; this post is not meant to serve as a defense of libertarianism.

(And in case any of you are wondering, no, I have never thought of myself as a libertarian. I think of myself as an ally to libertarians, but never one of them.)

However, no matter what kinds of clever curses you can throw at it, it doesn
t change the fact that Freedom Factory produced a good number of studies, surveys, op-ed pieces, translations, media appearances, and helped to spread awareness of the problems of over-regulating businesses and the history of the South Korean economy to the masses. It was a great think tank that saw a great vision for itself. But it went out of business because it couldnt turn a profit.

Pastreich can argue that corporate funding makes think tanks less independent, but not having enough money means that you go out of business. I wish Freedom Factory had the luxury of worrying about a lack of independence. It never even got that chance.

Though I don’t know for certain, I imagine there are many think tanks of various political affiliations that have met and will continue to meet a similar fate.

Regardless of how much people think of the corrupting nature of money, it doesn’t change the fact that corporate funding helps think tanks to do their work. It may not be a perfect solution, but its the best there is. Why is it the best? It’s the best because, going back to my earlier point, the vast majority of the unwashed masses have never even heard of many of the subjects a lot of think tanks and their employees have dedicated themselves to studying; and they dont care for them.

If you think money is the root of all evil, try not having enough of it.
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The last thing about Pastreich’s op-ed I disagreed with was his argument that think tanks undermine the work that is better done by government officials, government research institutes, and professors at universities. He says that unlike government institutions, think tanks seek short-term gains and this is particularly dangerous when we think about long-term problems such as North Korea.

s a wonderful thought that government leaders and bureaucrats are more dedicated to long-term goals than think tanks. Unfortunately, however, reality says otherwise. Case in point, South Koreas policy toward North Korea has changed from administration to administration. Whereas Kim Dae-jung (and Roh Moo-hyun) sought engagement with the North via the Sunshine Policy, Lee Myung-bak immediately pursued a hawkish policy. Park Geun-hye wasn’t nearly as hawkish as Lee Myung-bak (at least initially) or as dovish as Kim Dae-jung as she was an advocate of trustpolitik” during the early days of her administration and she only became hawkish after North Korea’s fifth nuclear test.

If you read any of my columns at NK News, it won’t take you long to know what I think is the proper way of dealing with North Korea. Again, however, this post is not meant to defend or attack one idea or another. The point is that the notion that government officials are somehow more dedicated to pursuing long-term goals than people in the private sector is utter nonsense. It is a praise that government officials and their research institutes clearly do not deserve.

(Whether this is a virtue or a vice of the democratic process is another matter entirely.)

In fact, the only things that the government has insisted on taking the long-term view, regardless of who has been 
in charge, are looking out for their own interests. Even the country’s progressive leaders never abolished the National Security Law or hesitated from using defamation laws to silence their critics in the media.

Also, is there anyone who can say with a straight face that professors are any more virtuous than those who work at think tanks? At the end of the day, to one degree or another, everyone is a whore. The only thing that’s different is whom he sells his soul to and for how much and how happily he does so.

One thing that Pastreich does get right is his comparison of think tanks to hagwons, though certainly not for the reasons he stated. The comparison is valid because, like the hagwon industry, the ideas that are espoused by many think tanks do not seem that different from each other and there does appear to be a strong herd mentality that is defined by an unhealthy dose of 
“follow the leader mentality. There does need to be an infusion of new ideas (not that being new by itself is a virtue) and healthy debate among think tanks and universities and government research institutes. That is how we make sure that we do not fall victims to our own filth.

So, yes, there is a feeling of staleness when it comes to private think tanks in Korea. But are they ruining policy-making? That hardly seems to be the case. Although some of Pastreich’s criticisms may be valid, he does not seem to have really thought through on the subject of private think tanks as much as he seems to think he has.