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Always thought provoking. Probably talks about every geeky concept ever… at Google no less:

Here is the online text to his new book “Future Imperfect.”

A month ago I mentioned that my coworkers and Korean friends were very concerned about the overall health of the economy. So what has changed in that time?

The Korean Won (pronounced wahn, like the Spanish Juan) is heading towards the water closet quickly. It hit a 7 1/2 year low today, having lost 30% of its value since January. It is predicted to lose another 10% over the next 6 months.

Korea’s baseline stock index (the KOSPI) has lost 36% of its value since January and may flirt with 50% before purging itself of the same deadweight banks and institutions that other countries are dealing with right now.

And Foreign Direct Investment (FDI) continues to plummet as foreigners are wary of investing in the South. FDI peaked at $9.2 billion in 2004 but has dropped annually, reaching $2.6 billion last year. This, during a time where global FDI increased by hundreds of billions, to a record $1.8 trillion — so Korea must be wearing stinky socks or something.

Despite all this bad news, even if Korea will endure a repeat of the ‘97-’98 crisis it is on an arguably better foundation than many other developed countries like Southern Europe.

The Good, the Bad and the Ugly

You see, just like mainland China, South Korea has been privatizing many of its state-owned firms. And as The Economist recently reported, despite tough conditions, this plan will continue for the foreseeable future; from 319 SOEs to 255. And this is great news for the Korean taxpayer because they will no longer have to subsidize faltering enterprises, plus the indebted government can use the proceeds to dig itself out of the hole it is in (among other things, a low sovereign debt rating from deficit spending).

It also has a free-floating exchange rate that could be beneficial once the politicians stop trying to influence its rate through central banking activity. In ‘97-’98 it did not. See “Economic Crisis and Chaebol Reform in Korea” (pdf) by Phil-Sang Lee.

And as much as I gave the Southern politicians a hard time for concocting a managed trade agreement, the fact that some of them are trying to liberalize and remove barriers is a step in the right direction; a step that most of the West is reversing.

Furthermore, in September the Lee administration proposed a series of tax decreases that if passed, should help soften the landing.

However, if the goal is to attract foreign investors and foreign capital, there are few proactive prescriptions that would will make Korea more competitive than regional players:

- create voluntary, tax-free personal savings accounts with no balance ceilings
- create voluntary, tax-free retirement accounts with no contribution ceilings (or at least along the lines of 401(k), Roth IRA)
- abolish all capital gains taxes

In addition, ideally the administration could become a safe haven if it put the currency on solid ground:
- liquidate state-owned financial firms like Korean Development Bank for hard specie that cannot be inflated, like gold or silver
- convert all of the foreign exchange reserves into gold or silver
- temporarily peg the won to gold or silver

Unfortunately the last three options are not allowed under IMF rules, as Article 4 Section 2b prohibits member states from linking their currencies to gold. So, temporarily removing itself from the IMF could add stability and make the currency attractive to foreign speculators.

Just what the doctor ordered?

Aside from the nationalistic undertones that the Lee administration occasionally is wrapped in, his is the most market-friendly in two decades. In addition, his transitional economic adviser, David Eldon, was purportedly successful in outlining the benefits of continued deregulation and privatization to the current cabinet.

However, it appears that Korean politicians want to get in on the business of bailouts, this time with Japan and China. If this is the case then I would temper whatever decision making process with the outlines provided by Mark Thornton: 1 2

I mention all of this because when the countries of Eastern Europe collapsed, no one, not even an academic, had really put together a point by point de-statification plan. And as a consequence, each member of the USSR haphazardly slapped various blueprints together — the end result was mixed and could have been much better, especially in Russia.

For those interested in East German reunification, I recommend “De-Socialization in a United Germany” (pdf) by Hans-Hermann Hoppe. For de-statification of the USSR, the collected works of Yuri Maltzev are quite informative.

[Note: ideally entities like the National Pension Service could be privatized by simply placing the money into private retirement accounts; either way, Koreans probably won't ever have to deal with the rigmarole surrounding the ghastly US Social Security scheme. More on this later.]

Notes in the margin

My latest Mises piece briefly discusses central planning in North Korea. And while the footnotes are copious I highly recommend a recent piece from The Economist entitled “The odd couple” which gives an overview of the hurdles of unification.

In my recent piece I also briefly mentioned dictators in South Korea. Most people don’t know this, but for roughly forty years, a series of military coups dominated Southern politics. The last one involved Chun Doo-hwan and was portrayed in a good movie called May 18. Check it out when you get a chance.

See also: Asian Tiger or Asian Kitten?