Veni, Vidi, Gucci

Meet Choi Ju Hee, savior of the South Korean economy. Armed with two credit cards and an allowance from her parents, she spends at least $600 a month on clothes, drinking with friends and a serious cell-phone habit (her father once cut off her home phone for a month to teach her a lesson on the cost of things). Her most prized possession: a pair of Salvatore Ferragamo loafers. What she badly wants: a pair of Prada sneakers. On a recent shopping expedition, she eyes a white cotton DKNY skirt. Her mother steps in, telling her it is “too fancy.” But by the end of the day, Choi has bagged two blue, $70 Ralph Lauren shirts. “They are fearless when it comes to spending money,” says her mother. “These kids don’t really thinkthey just want to buy everything.”

Choi, 20, may be making life difficult for her parents, who remember a time when Korea was as poor as Bangladesh. But she is one reason why Korea’s economy, amid global recession, is currently outperforming nearly every other country’s in the world. Churning out everything from ships to semiconductors, Korea emerged as an export powerhouse during the last decadeit was international trade that allowed the country to bounce back from a brush with disaster during the Asia crisis four years ago. In the current downturn, things are different. With demand from the U.S. skidding, Korea has not only not tanked; it has, in fact, escaped recession altogether by tapping growth from an uncharacteristic conduit: domestic consumption.

Plenty of problems remain, including bust or near-bankrupt corporate giants such as Daewoo Motor and Hynix Semiconductor. But thanks to restructuring efforts forced by the crisis, the economy is proving to be surprisingly resilient, mature and self-assuredespecially so considering that the international investment community classifies Korea as a developing country. Consumer confidence is booming, and a survey of 600 companies last week showed business confidence is at a record high. Stocks seem to be weightlessthe benchmark Kospi stock index has soared 75% since Sept. 11.

So, while Europe is still groggy and the U.S. is just starting to show signs of a pulse (and Japan of course is still down for the count), little Korea will grow anywhere from 3.2% to 6% this year. That would make it the star performer in Asia after mighty China, expected to post growth of about 7%, according to official, and largely disbelieved, government estimates. Says Paul Presler, a market analyst and equity salesman at Nomura Securities in Seoul: “Korea has done a better job of restructuring and attracting foreign investment than anybody else in the region.”

Unlike China, which continues to support economic expansion by building factories and grinding out exports, Korea’s engine is increasingly turbocharged by Pocketbook Power. Manufacturing output as a percentage of GDP stood at 32% in Korea in 2000; the services sector was larger at 43%. Domestic spending by the country’s 47 million consumers has grown from about 50% of GDP in 1987 to 58%. With more than 1 million service sector jobs added since 2000, it looks like Korea will be the first Asian economy to make the leap from an industrial-led to service-driven domestic economy. With citizens increasingly sanguine about their future even when the world economy is stumbling, sales of durable goods like washing machines and fridges have tracked higher since last September. Car sales were up 5% last year to 1.45 million units; overall consumer spending jumped 9.4% in the last quarter of 2001, compared to a year earlier. Construction is booming, and home renovation is suddenly popular. Dozens of upmarket furniture stores have opened in the past two years to feed soaring demand for snazzy modern-looking interiors. Says interior designer Yu Young Chol: “Five years ago, one in five people were interested in redecorating their homes. Now everybody is doing it.”

Koreans are also spending more to pamper themselves and have fun. Instead of buying cheap, no-nonsense shampoos, they are heading to the body-care shops that have sprung up everywhere to buy tropical-scented gels and pricey hair-care products. Sports clubs are opening up and yoga classes are all the rage. Koreans are eating out more and going to the movies. And not just Hollywood blockbustershomegrown films now account for 46% of the market in Seoul, up from 25% in 1998. After the show, citizens sip cappuccinos in Seoul’s new crop of serious coffee shops. Foreign franchises like Starbucks and dozens of local outlets are competing for a market that barely existed two years ago. “People like the idea of walking around with a paper cup, it makes them into something else, maybe a New Yorker,” says Ahn Ung Chun, owner of Caffe Italiano in the Seoul suburb of Bundang. “Because it’s something new, the demand keeps growing. We are creating the consumers.”

And consumers are creating companies. Domestic spending is helping make the Korean business sector more diverse, by spawning start-up enterprises in the technology and service industries. High-tech alone now contributes 15% of GDP, up from less than 8% in 1997. For a quick tour of the new economic landscape, log on to the Internet and check out http://www.freechal.com. One of the Web portal’s hottest products are avatars, digital cartoon characters that stand in for real people in Internet chat rooms. Freechal started charging for avatars last June. Already the company has captured some 110,000 Korean customers who spend an average of about $2.30 a month each on outfits and accessories for their virtual paper dolls. Doesn’t sound like much, but it adds up to a $2.4 million boost to the local economy every yeargenerated by a company with no factory floor, whose only tangible product is intellectual property.

Diversification is also helping to create new jobs outside Korea’s traditional mainstay employers, the conglomerates, which have been forced to shed staff to stay competitive. Shim Kyung Joo was working at giant Sunkyung Chemicals’ game division when the Asian crisis hit. The financially strapped chaebol had to trim its business empire, so Shim secured some venture capital from the government and turned his division into a software company called Wizard Soft. Freed from the dead hands of chaebol executives, Shim and his young gamemakers were soon spinning off hit products like Jurassic Era Primitive War II. The company has been profitable since its launch in 1999. Says Shim of his former employer: “They didn’t know games, they delayed decisions and blocked at every turn. Wizard is quick and efficient.”

In no small sense, Korea has been blessed by disaster. The 1997 crash forced government leaders to put the economy through the wringer: on the brink of bankruptcy, the government cleaned up the creaky financial system and reined in the big chaebol conglomerates, blamed for killing the economy with reckless borrowing. While other Asian countries, most notably Japan, have been slow to excise the failing companies and unproductive assets that are a drag on economic growth, Korea has been more ruthless. For example, bad debts at Korean banks were reduced by more than 55% last year thanks to aggressive disposal of distressed assets. Meanwhile, Japanese banks are on the verge of collapse as loans to unhealthy, noncompetitive companies continue to sour.

Seoul has also unleashed long pent-up consumer demand by easing limits on credit-card use, among other measures. Koreans were once avid savers, encouraged by government policies designed to funnel domestic capital to industry to bulk up manufacturing capacity. Today, citizens are shopping more and saving lessSouth Korea’s savings rate measured against GDP has declined by 10 percentage points since 1987. In the rest of Asia, by contrast, domestic savings rates have remained at Scroogian levels.

Koreans also used to pay for everything in cash. But with credit cards readily available and tax breaks for using them, shoppers are pulling out the plastic. Says Seo Eun Hee, an office assistant at Seoul National University: “It’s easy and fun. I spend more than I used tobefore I couldn’t go into a department store and buy whatever I liked.” Last year, $235 billion worth of merchandise was purchased on credit, up from less than $50 billion in 1998. Koreans are stretching their purchasing power in other ways. The government used to shoo banks away from consumer lending for big-ticket items such as cars and homes. Today, retail lending is rapidly replacing loans to giant conglomerates as a safer source of bank revenue. This new consumer borrowing has pumped tens of billions of dollars into the economy.

Thomas Byrne, a senior analyst with U.S. credit rating company Moody’s Investors Service, says the crisis taught the country humbling lessons and reduced the insularity of corporate and government leaders. Byrne was in Seoul recently, scrutinizing the economyMoody’s is considering boosting Korea’s foreign currency rating, a move that would help cut borrowing costs. He says just getting essential data out of officials used to be difficult. Now Byrne has the Deputy Finance Minister’s home phone number and spent some time during his trip knocking back shots of fiery soju liquor with him. “We didn’t used to have dinner with the Finance Minister,” he says. “Now it’s routine.”

Even the most bullish Korea watchers say the country still has much to do to streamline its corporations. For decades, Korea’s economy was driven largely by government policy. Today, there’s a laissez-faire shift and the adoption of free-market principles. But big family-run chaebol are still uncomfortable with the notion that shareholders should have a say in the company; transparency and disclosure still fall short of world standards. Corporate debt is still too high and better bankruptcy lawsnow in the planning stageare needed to speed the disposal of unprofitable companies. Unfortunately there are still too many of those.

A robust recovery in the U.S. would make the outlook for Korea that much brighter. Korea’s big electronics exporters will benefit when Americans start buying more cell phones, stereos and fridges, particularly Samsung Electronics whose nifty DVD players are already a must-have item for U.S. consumers. As the world’s biggest semiconductor maker, the company would also get a boost from a pickup in the U.S. high-tech sector. Other beneficiaries: the myriad suppliers to Korea’s shipbuilders, carmakers and other chaebol exporters. Korea’s dependence on the U.S. market has lessened, but it is still a big part of the picture.

The government of President Kim Dae Jung gets pretty good marks on the progress so far. But bureaucrats at the Finance Ministry are still reluctant to let big companies go bust (although the collapse of the Hyundai group and Daewoo show you can’t be too big to fail anymore). The government also must push ahead with the sale of state-run banks and corporations. An ongoing strike over the privatization of the Korea Electric Power Co. shows how tough that will be, especially with local elections in June and a presidential vote at the end of the year.

In the meantime, as long as young Koreans like Choi keep on spending, then Korea’s GDP should keep ticking higher and the good times will keep on rolling. Now, what about that DKNY skirt?