Archives for March 2008
Why You Can’t Buy Anything On-Line in Korea, Mr. Foreigner
by Brendon Carr
Feeling frisky after my success fixing the housing policy problem, I contributed this piece to my firm’s “Law Talk” series in the Korea Herald today.
I’m not completely happy with the final piece, after the “editorial process”, nor the headline supplied by editors—which I think misuses the word “crimp”—but within the 550-word limit allowed by the paper, it’s not all that bad.
Encryption standards crimp Korean internet from globalizing
Korea Herald, March 26, 2008President Lee Myung-bak’s new administration promises deregulation to improve transparency and the harmonization of Korean practices to so-called global standards. He has his work cut out for him as regulatory choices made around 10 years ago have resulted in Korea’s IT environment being isolated from practices used in the rest of the world. Rather than leading the global community, Korea’s government-led choices have often erected barriers and stagnated development.
Web browsers offer a fine example. In 1998 it was recognized that 40-bit Secure Sockets Layer encryption was insufficient security for internet-based financial transactions. More bits make codes harder to crack. But the United States at that time barred the export of encryption algorithms using more than 40 bits.
In other countries, the U.S. ban on the export of strong encryption created market opportunities. South African entrepreneur Mark Shuttleworth became a billionaire offering the rest of the world 128-bit SSL encryption from Cape Town, outside the reach of U.S. law.
Rather than leave this function to the market, the Korean government instead led the development of official 128-bit encryption based on a homegrown standard called SEED, which uses digital signature certificates issued by a Korean government-approved institute and requires users to install a downloadable ActiveX control into the Windows Internet Explorer browser.
Ten years later, we’re stuck with it. Under the Electronic Financial Transactions Act, SEED encryption is required for most credit-card transactions, despite the fact that all other banks around the world find 128-bit SSL security strong enough.
Korea’s SEED does not work on Apple’s Mac OS X (nobody in Korea has developed a SEED implementation that doesn’t require Windows), nor does it work on the Mozilla Firefox and Opera browsers. Neither does SEED work on Linux.
Only Microsoft Windows users may use the Korean-standard security system for internet transactions. Macintosh and Linux users are cut off from such transactions—by official government policy.
Many of the SEED implementations are sloppy. Programmers assume that whoever downloads SEED must be using a Korean version of Windows, and therefore don’t need any instructions in other languages. English Windows versions also display the Korean-font download controls as gibberish, thereby preventing installation.
In 1999, the U.S. government allowed export of strong encryption. But by that point it was too late for Korea. Since 1999, government officers charged with enforcement of the only-in-Korea SEED standard have not relented and accepted the global dominance of SSL, which is built into all browsers.
SEED locks foreigners and users of other computer operating systems and non-Microsoft browsers out of the Korean market. It prevents Korean online merchants from selling to nonresidents of the country, who are not likely to have obtained Korean government digital signature certificates or to run a Korean-language version of Windows.
Outside Korea, Mac OS X and Linux comprise nearly 10 percent of the worldwide operating system market. Non-Microsoft Web browsers approach 45 percent of the worldwide market. The SEED encryption requirement locks Koreans out of wider trends and forces them to use Microsoft Windows and Microsoft Internet Explorer.
Both are fine software programs, but the government should not be in the practice of forcing users to choose them by the Electronic Financial Transactions Act, especially when equivalent functions are available.
If President Lee’s team wants to move Korea closer to global standards and internationalize Korean practices, amending the Electronic Financial Transactions Act to dump SEED in favor of the already-existing SSL standard would be a good start.
There are, of course, other reasons you can’t buy anything on-line, Mr. Foreigner. They include the ubiquitous foreigners’ registration number, which doesn’t work with most of the ID-checking algorithms in use, and sloppy coding practices for the HTML to be displayed in your browser. A lot of Korean websites simply won’t show anything to a Firefox or Safari user, which tends to keep us away from the payment-processing stage where SEED would be required.
UPDATE: A Korea Herald reader wrote me this morning with the following comment:
Congratulations on a finely argued piece. I’d add just one other point - it is not in Korea’s national interests (or any other small country’s) to promote a foreign monopoly in a key component of technological infrastructure.
Good point. Five hundred words precludes a writer from getting every point into the newspaper—which is why the availability of unlimited Internet space, and the interactive opportunities of blog comments, makes this the place to add more. To the reader (and all readers): If you think other points are important, leave a comment here at Korea Law Blog.
In Which I Advise the Minister of Construction
by Brendon Carr
Okay, not really. But in actual fact, a number of Korean think-tanks apparently follow my posts on housing (according to my referrer logs), and now we have the Ministry of Construction and Transportation looking here. The Dong-A Ilbo English edition today reports the Lee Myung-bak government’s response to the housing crisis: Do what Korea Law Blog recommends.
In my blog entries on this topic, I’ve urged the government to deregulate land-use restrictions to increase the supply of developable land:
The government decided to lift regulations on farmlands and mountain lands in suburban areas to expand the ratio of the urban land to the entire territory from 6.2 percent to 9.2 percent by 2020. This widens the urban area by 1.5 folds nationwide. The expanded area is five times larger than Seoul....
The government will also drastically reduce some 390 overlapping regulations in land usage.
And to allow more intensive use of existing land in the areas where there is high demand:
Under the draft plan, the ministry will expand the supply of houses in areas near subway stations in cities by raising the floor space index, and allow the construction of skyscrapers in which hotels and apartments coexist in special economic zones.
The article is interesting, in that it also reports the government making government-owned land available for housing development, in order that the land-cost component of new housing might be reduced. Because the Ministry of Construction and Transportation also plans for transportation, the article reports plans to extend bus-only lanes in the densely-populated Seoul-Suwon-Pyongtaek urbanized corridor down the Seoul-Pusan Expressway.
Since I suspect transport grandees might also be reading Korea Law Blog, at this time I’d like to highlight another infrastructure-investment suggestion for The Bulldozer to consider: Express trains on the subway, to make longer-distance commuting more bearable for the folks who live in Seoul and commute across the city. Currently, all the existing subway lines (Lines 1-8) have just two tracks, which means that no express service is possible. Line 9, currently under construction, is being built to accommodate express services. Why not dig up the existing subways and make express service possible on the key lines? Line 1 and Line 2 would be a great start.
Korea’s Own “Sub-Prime” Housing Crash in Sight?
by Brendon Carr
A faithful reader forwards this story of ominous portent—construction companies are going bankrupt, while unsold apartments are mounting even in Seoul (the unsold inventory leaped 50% in a month!) because buyers are taking a wait-and-see attitude toward purchase:
Non-Banks Suffer From Housing Market Slump
Korea Times, March 24, 2008The ongoing housing market slump could hit construction firms and the non-banking financial sector hard, creating a crisis that may resemble the unfolding sub-prime mortgage debacle in the U.S, a state-run research institute warned Sunday.
The Korea Institute of Finance (KIF) said in a report that the country’s construction industry is grappling with a large number of unsold apartments, as potential homebuyers have taken a wait-and-see attitude since early last year on expectations that housing prices will fall.
It said if the housing market remains stagnant, many builders, particularly smaller ones based in provincial areas, could go bankrupt. “Paired with surging prices of cement and other construction materials in recent months, the sluggish housing market has worsened the bottom line of construction companies,” KIF researcher Shin Yong-sang said.
He also said savings banks, credit cooperatives and other non-banking institutions could face increasing risks of insolvency as they have extended long-term loans to builders in project financing (PF) deals.
Non-banking financial institutions have extended loans to builders for housing construction over the past few years. But the housing market slump is hitting construction firms hard, weakening their ability to meet interest payments and pay back principals.
“Savings banks exposed to unprofitable PF deals need to secure enough liquidity through the issuance of subordinated bonds and other methods. They also need to diversify revenue streams by focusing more on retail lending businesses, including credit-based loans and asset management,” Shin suggested.
The number of unsold apartments has reached its highest rate in 11 years. According to the Ministry of Land, Transport and Maritime Affairs, the number of unsold apartments nationwide totaled 123,371 in January, up 9.9 percent from a month earlier. The figure was the highest since July 1996 when the figure stood at 127,573.
Construction companies increased the supply of new apartments last year to bypass the apartment price cap. They preferred to sell a few homes at high prices earlier than selling cheaper homes later, in the belief that even the expensive ones will eventually be sold as the prices of neighboring ones go up.
But prospective homebuyers have delayed purchases on expectations that they could buy houses at a cheaper price because of a range of government regulations, resulting in a record number of unsold new apartments.
Not only in provincial areas, but also in Seoul and its adjacent areas, the number of unsold apartments has rapidly increased.
The Seoul metropolitan area had 21,724 unsold apartments in January, up 7,100 from the previous month, while the number of unsold homes in provincial areas increased by 4,017 over the one-month period.
With mounting unsold apartments, many small construction firms have gone bankrupt. The number of builders that went bankrupt totaled 57 during the first two months of the year, up 50 percent from the same period last year.
The smaller construction companies tend to be the ones building “villas” or off-brand smaller apartment complexes with 10-50 units. Demand for that product is less than the demand for larger “tombstone” high-rise apartment complexes.
Make no mistake, the housing market is overvalued. My own crummy little (1150 sq. ft.) apartment at the edge of the central business district is worth, according to the local realtors, W650,000,000. (And it feels worth less than half that.) The question is how to bring prices more in line with incomes—or incomes more in line with prices. Bringing incomes more in line with prices is the preferable method because it involves less pain, but there is a large gap to cover: For Seoul to have a median multiple of just the 7 which is considered insane in London (instead of the 19.8 reported last year), the average household income will have to reach W100 million.
As I previously reported, we bought in November 2003 for W370,000,000. In August 2007 the local realtors had signs up saying similar 43-pyong properties in our complex could be had for W500,000,000. Imagine my surprise to see them telling me I could buy for W650,000,000 just eight months later—a jump of 36%! There are some other factors driving prices in our neighborhood, like the construction of a new complex opening May 2009 whose 43-pyong units sell for W770,000,000 (so they say) which will bring a general improvement in ancillary neighborhood facilities like shopping and hagwon cram schools.
I still think the Seoul unsold inventory problem is primarily one of Roh Moo Hyun’s making, as is the 30% decline in new supply forecast for 2008. But ultimately, if families cannot afford to purchase at the prevailing prices, prices will have to come down or the inventory will remain unsold. If the market thinks that prices will decline on a sustained basis, buyers will hold off. These construction companies are holding inventory, waiting to see who will blink first. But the market never blinks. It is relentless and remorseless.
Anyway, with the local housing bubble showing signs of strain, and North Korea possibly at the brink of collapse (you do read One Free Korea, don’t you?), Korea faces chill economic winds indeed—and without the benefit of a US expansion into which to dump exports. No wonder the Korean won is so volatile!
Global Warming Has Stopped?
by Brendon Carr
So says this article in The Australian. But if our evil industrialized lifestyle, and carbon emissions, was solely responsible for global warming, and emissions are up—wouldn’t the warming trend have continued past 1998?
The Australian columnist Christopher Pearson reported on an interview involving the co-host of Counterpoint, Michael Duffy and Jennifer Marohasy, a biologist and senior fellow of Melbourne-based think tank the Institute of Public Affairs in which it was discussed how new satellite data doesn’t fit the global-warming orthodox opinion. As Pearson notes, “Anyone in public life who takes a position on the greenhouse gas hypothesis will ignore it at their peril”. Here we go:
Duffy: “The climate is actually, in one way anyway, more robust than was assumed in the climate models?”
Marohasy: “That’s right ... These findings actually aren’t being disputed by the meteorological community. They’re having trouble digesting the findings, they’re acknowledging the findings, they’re acknowledging that the data from NASA’s Aqua satellite is not how the models predict, and I think they’re about to recognise that the models really do need to be overhauled and that when they are overhauled they will probably show greatly reduced future warming projected as a consequence of carbon dioxide.”
Duffy: “From what you’re saying, it sounds like the implications of this could beconsiderable ...”
Marohasy: “That’s right, very much so. The policy implications are enormous. The meteorological community at the moment is really just coming to terms with the output from this NASA Aqua satellite and (climate scientist) Roy Spencer’s interpretation of them. His work is published, his work is accepted, but I think people are still in shock at this point.”
What will become of all the people who make their living telling us about global warming? The Nobel Prize winning liars, the jet-setting NGOs trying to force the rest of us back 500 years, the carbon-trading hustlers, the government regulators, the schoolteachers filling children’s heads with lies—boy, talk about an inconvenient truth!
“Easing Environmental Regulations” Not A Surrender to Pollution
by Brendon Carr
I saw an interesting piece in the Dong-A Ilbo and dug up the English edition. Pres. Lee Myung-bak’s “business-friendly” government is easing environmental regulations to allow expansion of factories near water sources. This is part of a massive wave of deregulation and rationalization of government activity forecast to take place under LMB.
Right now, factories cannot be constructed within 20km of upstream water sources, while there is no similar restriction on non-factory construction. The Environment Ministry intends to shrink the factory exclusion zone to 7km, so long as waste water is not discharged. In other words, the Environment Ministry in the past assumed that all factories were going to dump pollution, but because the Ministry—like most Korean government agencies—does very little actual monitoring of industry, the only way to reduce harm was to bar all factory establishments in areas where the discharge was likely to get into water sources.
LMB’s Environment Ministry signals a different approach, one in which government regulators are going to have to actively inspect and monitor industrial sites on a regular basis. This is the way that most industrial states operate, and will be a welcome improvement.
National Pension Service Puts Muscle Into Corporate Governance Reform (and Fails)
by Brendon Carr
Day by day, it begins to look like President Lee Myung-bak, product of Korea Inc., and his band of advisors may be those bold reformers Korea needs to make the move to the next level of prosperity. Last week the JoongAng Ilbo English edition reported that the National Pension Service, a major institutional investor, declared its intention to vote its shares against convict CEOs of two major conglomerates. A major step forward in corporate governance!
NPS made its move at the urging of the government:
The Health and Welfare Ministry said yesterday that the pension fund, which is under the ministry, will vote to oust both Chung [Mong-Koo] and Park [Yong-soo] from the boards of Hyundai Motor and Doosan Infracore [respectively].... The decision is even more remarkable since the new Lee Myung-bak administration is presumed to be more friendly to large conglomerates than was the liberal-leaning Roh Moo-hyun administration.
A Health Ministry official who refused to be identified said, “Business-friendly policies are different from overlooking managers with problems.”
However, there was some doubt as to whether the effort to impose consequences onto chaebol “owners” would be successful. It was posited that only foreigners and the LMB administration (mostly foreign-educated) care about corporate governance:
The move, combined with a call by ISS Governance Services for Chung to step down, could prompt other institutional investors, especially foreigners, to threaten the embattled chairmen, some market observers said. ISS, a global investor-advisory service, said Chung’s conviction last year hurt the company’s interests.
More analysts, however, doubt that the pension service decision will bring down either boss.
“Foreign shareholders now account for only 30 percent of Hyundai Motor after the recent selling spree of Seoul stocks,” said Suh Sung-moon, an auto industry analyst with Korea Investment and Securities. “So the pension’s decision will not be influential enough to actually oust Chung from the board.”
The National Pension Service held a 4.6 percent stake in Hyundai Motor and a 2.9 percent stake in Doosan Infracore as of December.
And they were right: Like clockwork, Chung Mong-koo and a host of other chaebol chairmen were re-elected Friday, along with slates of directors proposed by the “owners”. I haven’t found whether Park survived the vote, but imagine that such news would be so shocking as to have made all the papers if he was ousted.
However, fear not! According to the JoongAng story last week, both Chung and Park are ready to do better:
Both conglomerates expressed regret. An unnamed representative of Hyundai Motor said Chung, whose father founded the company, “can manage the company with more sense of responsibility than an employed CEO. Our company is making efforts to correct the wrong practices of the past.”
A spokesman for Doosan, who also refused to be identified, said Park is doing his best for the company.
In other news, Warren Lichtenstein has had enough of KT&G, and will quit the board.
I don’t have a position on whether Chung, Chey, Park, or any other chaebol chairman (except for that Hanwha guy) are or are not good for their companies. Chung Mong-koo, in particular, seems to be a hell of a good manager for Hyundai Motor—relentlessly driving the company forward in quality and sales. Doosan, too, is a group strongly on the ascendant under Park’s leadership.
But the fact is, in the United States or United Kingdom, these guys would be toast as chief executives of publicly-traded companies. In the West, the standard for corporate executives’ ousters is not the fact of impropriety, but the appearance of impropriety. The so-called “Korea Discount” will continue to depress asset values here in Korea—affecting the National Pension as well as other domestic investors—as long as management remains so strongly entrenched that no form of misconduct (embezzlement, stock-price manipulation, fraudulent accounting, beatings with lead pipes etc.) can result in their removal.
I don’t agree with the unnamed Hyundai man who says that family managers do better for the company because they feel a sense of responsibility. My take is family managers feel a sense of entitlement and impunity. Family managers will do much better if they feel a sense of fear that if they screw the shareholders or behave inappropriately, they’ll be out.
Want to ensure the solvency of the National Pension, and goose returns for the future? Require higher standards of corporate governance. I think the government is on the right track here.
David Mamet Comes Around
by Brendon Carr
As if this wasn’t more-or-less obvious to anyone watching The Unit the past three seasons (it’s on cable here in Seoul now too), playwright/showrunner David Mamet has recovered from his persistent vegetative state.
It’s a Housing Crash All Right
by Brendon Carr
But not the type that will restore affordability to the expensive Korean housing market.
As it turns out, former President Roh Moo Hyun taking economic advice from Karl Marx may not have helped the housing situation in Seoul after all:
Apartment Supply on Sharp Decline
Maeil Kyungjae (English edition) 11 Mar 2008Aftereffects of the apartment price cap are being witnessed. Supply of apartment houses is rapidly declining as constructors have virtually stopped selling new apartments under the judgment that it would be difficult to make ends meet under a price cap.
Opposing a large supply of new apartments dodging the price cap from last November to this March, the quantity of supply has halved in April from a year earlier and shrunk 61 percent from a month ago.
Doctor Apartment, a realty information provider, reported Tuesday that apartment houses which are to be sold in April nationwide totaled 20,268 in 54 regions, down 52.4 percent from the previous year’s 42,600 and 61.5 percent from the previous month’s 52,740. Seoul and the nearby regions (11,370) are likely to maintain the previous year’s level (12,669) while other cities and provinces which have already been loaded with unsold apartments will see a large dip in supply.
A recent survey of ten major constructors has also indicated a sharp decline in apartment supply this year.
Ten constructors including Daewoo Construction had supplied total 36,065 apartment houses in the Seoul region last year; however, the supply was forecasted to be reduced to 27,773 this year including 3,571 units in public housing sites; 11,722 in private housing sites; and 12,480 reconstructed apartments.
Really? But price controls are working so well in Zimbabwe.
Requiem for Hamsterdam: The Wire Producers on America’s Drug War
by Brendon Carr
HBO’s The Wire is one of those only-on-cable dramas that make pay television compelling and the metastasizing spread of CSI on free-to-air TV all that more depressing.
Violent and foulmouthed, yet incredibly smart, The Wire chronicles crime—mostly the drug war—in the bleak collapsed cityscape of Baltimore. Creators Ed Burns and David Simon are the bards of Balmer, telling its stories from the perspective of the po-lice first on the late, great Homicide: Life on the Street on NBC, then to HBO for The Corner: A Year in the Life of an Inner-City Neighborhood and finally The Wire.
This week HBO will air the 10th and final episode of the fifth and final season of The Wire. Since good television touches the soul, the passing of any show like The Wire merits a mention in our newspapers and magazines of record. And so Time carries an essay from Burns and Simon and their co-producers Dennis Lehane, George Pelecanos and Richard Price that mirrors my own feelings on the drug war:
What the drugs themselves have not destroyed, the warfare against them has. And what once began, perhaps, as a battle against dangerous substances long ago transformed itself into a venal war on our underclass. Since declaring war on drugs nearly 40 years ago, we’ve been demonizing our most desperate citizens, isolating and incarcerating them and otherwise denying them a role in the American collective. All to no purpose. The prison population doubles and doubles again; the drugs remain.
A wonderful essay; well worth your time to read. See also Radey Balko’s interview of Ed Burns—“Someone Has to Start Wondering What the F is Going On”—at Reason Online.
As the writers mention in their Timeessay, last week we were treated to the news that 1 out of 100 Americans (and one out of 15 black Americans) is in prison—a shocking statistic. And so much of it is due to the senseless drug war. When I was in law school, I had a friend who was a year ahead of me—and who I knew was a recreational marijuana user—interviewing for a job with the Justice Department.
He spent a few days before the scheduled interview, which apparently included a urine test for drug use, scrambling to find an alchemist or fake-weiner vendor to help him evade detection—so that he could go into the machine that was locking up poor blacks on life sentences for the very same behavior! It was shockingly wrong.
Here on Korea Law Blog and elsewhere on Korea-related blogs, I’m hard on the potheads because I think they’re dumb for (i) smoking weed, which is something I wouldn’t do myself; (ii) smoking weed here in Korea where the authorities are hard after weed-smokers (especially foreign ones); and (iii) crying about it when the inevitable denouement arrives. But ultimately, I’m a libertarian: For the reasons articulated so eloquently in the Time essay, for America I think drugs ought to be legalized.
For those of us in Korea, I haven’t noted Korean cable channels carrying The Wire. But it’s available on DVD and BitTorrent.
Dos Tacos Means Seoul Getting More Livable
by Brendon Carr
I still remember when getting up to the McDonald’s in Apgujeong-dong was big news to us poor swabs stuck in Pyeongtaek.
The JoongAng Daily has run a review of a Mexican restaurant—not exactly a new restaurant, but hey—that should be on the list of any expat resident of Seoul: Dos Tacos at Kangnam Station (between Kangnam Station Exit 6 and the Kyobo Building one looooong block to the north). It’s good. We really need one to open in the City Hall area.
Remember Bill Kapoun: Enrollment for National Medical Insurance Program
by Brendon Carr
Last week, news that Bill Kapoun, a handsome young English teacher, and his girlfriend had been burned in a house fire swept the expat community here in Seoul. A lot of people—including my family—opened up their purses to donate funds for his staggering medical expenses, as Bill Kapoun was not enrolled in Korea’s National Medical Insurance Program.
The Korea Times and Korea Herald both covered this story of profound interest to the English-teaching community, whose members are often not insured themselves.
Sadly, Bill Kapoun died Sunday morning after a week in intensive care and an array of skin-graft operations intended to keep him alive and stable enough to be transferred by medevac to a burn unit in Chicago.
Why is this relevant to you? There are a lot of differences in how Korean society treats foreigners in comparison to nationals, but access to the National Medical Insurance Program operated by the government is not one of them. If you’re not insured, you don’t have to stay that way.
All lawful foreign residents are permitted—indeed, obligated—to subscribe (except for some well-remunerated foreign investors who can opt out if they have a global insurance plan). This means all English teachers on E-2 visas, students at Korean universities, industrial trainees, and so forth. I have heard, but don’t know for certain, that even illegal residents are also permitted to subscribe.
In respect of full-time employees, the law requires employers to pay half the premiums for National Medical Insurance Program subscriptions; employees bear the other half. Full-time employees are anyone who works 15 hours or more per month. Their employers pay half, they pay half. Part-timers are not excluded from the scope of coverage—part-timers just have to bear all the premiums themselves if their employer doesn’t voluntarily pay up.
Just because your employer wants to dodge the expense of bearing the employer portion (half) of the National Medical Insurance Program premiums (usually something trivial like thirty bucks a month—half of sixty), you can still subscribe for insurance at your local district office (gu, shi, or gun).
The National Health Insurance Corporation (NHIC) has an English-language website, and an English-language helpline at (02) 390-2000. There is also a comprehensive English-language brochure available at the NHIC website which explains most aspects of the program. Because this is Korea, the brochure is well-hidden on the NHIC website and its prose is not always as clear as one would like—but it’s a substantial effort to communicate with foreign residents of Korea.
Since the brochure is hard to find at the NHIC site, I’ve downloaded it and placed it on my Korea Law Blog—you can click here (Adobe Acrobat PDF, 2.27Mb) to download it for yourself.
And yes—everyone should also carry a supplemental accident and health insurance policy from a private insurer like AIG. The National Medical Insurance Program covers just half the cost of most surgeries, and many things—like Bill’s multiple skin-graft surgeries, at W15,000,000 each—are not covered at all. Without a supplemental policy, the costs of a catastrophic incident can reach the stratosphere.
More Property Craziness Under MBnomics
by Brendon Carr
Since the election of Lee Myung-bak, property prices have firmed or increased a little on the hope that punitive tax policies of the Roh administration will be repealed (part of the “MBnomics” he’s promising). Now a complex coming onto the market in the Ttukseom district—which abuts the “Seoul Forest” park—hopes to test the willingness of the market to absorb luxury apartments north of the Han River (English Dong-A Ilbo today).
Property watchers are looking for the Ttukseom apartments to sell for W45 million per pyong (3.3 sq. m. or 36.4 sq. ft.)—that’s US$1300 per square foot of gross floor space. (Note that Korean apartments can have usable floor space ratios of 70% or less; I’ve seen 55% in complexes with lots of facilities.)
But is there enough demand?
The construction industry says it will take almost one year to sell all of the apartments. Builders will seek to create a well-known luxurious community by drawing famous people. This is why they did not flinch when only one qualified buyer expressed interest in purchasing an apartment from Daelim Construction since the company began selling its luxury apartments Tuesday.
And if Korea’s wealthy will pay those kind of prices to live in Ttukseom, that will mean Gangnam apartments will be even pricier:
Real estate brokers in the posh Gangnam district of Apgujeong-dong, a neighborhood across the Han River from Ttukseom, say that if consumers are willing to pay 45 million won per 3.3 square meters in Gangbuk, the price of Apgujeong-dong homes could rise to at least 50 million won per 3.3 square meters.
That would make the 43-pyong size that I live in sell for up to W2.15 billion (US$2.27 million) if it were in Gangnam. In my crummier neighborhood close to the Kwanghwamun Central Business District area, that size is going for W680-800 million (US$720,000-850,000)—a bargain! (Let’s buy two.)
This is crazy. I really need to sell my apartment and put cash in my pockets before the crash. Or buy in a cheaper market, like London, Manhattan, or Tokyo. I saw you can get a 43-pyong three-bedroom brownstone apartment in the Upper East Side for the bubble price of US$1.7 million. All I need now is an US$800,000 mortgage…
Weather Channel Founder Calls for Al Gore to be Jailed
by Brendon Carr
Okay, not really. But Weather Channel John Coleman is calling for Al Gore and the other climate hucksters to be dragged into court to prove their “science” in an actual head-to-head contest instead of shouting down heretics.
But I would still like to see Al Gore jailed.
Korea National Pension Becomes Eat-and-Run “Vulture” Investor
by Brendon Carr
Yesterday the National Pension Service (NPS)—manager of Korea’s Social Security-like retirement pension plan—announced its intention to invest $300 million in some private-equity funds operated by “TPG”, or Texas Pacific Group.
A reporter dropped me a line asking if I thought it was a “surprising move” for NPS to be putting such an amount of money into TPG, whose current fund-raising is aimed at coming up with $7 billion for distressed financial institutions. The reporter thought with the current sub-prime crisis and market turmoil in the United States that investments in financial institutions might be too risky for NPS.
Maybe. But consider this—Korea knows TPG. They have a history together.
Rescue of Korea First Bank
In consortium with Newbridge Capital (or maybe TPG invested in Newbridge, I don’t remember), Texas Pacific Group rescued the insolvent Korea First Bank (now known as Standard Chartered Bank’s subsidiary SC First Bank) in the dark days of the Asian Financial Crisis, and turned that bank around. Newbridge sold its 51% stake for a respectable profit (I think they made a 300% return on investment in six years)—and the Korean goverment, which retained a 49% stake, also made money thanks to the private-equity “vulture” investors.
The tax-free nature of Newbridge’s gain, thanks to transaction structuring done in accordance with then-current tax treaties and the most concrete government guidance (i.e. oblique whispers, and evasive responses, with the government refusing to write anything down so as to be able to reneg on advice five years later), provoked a disappointing orgy of Roh-orchestrated public outcry. Newbridge making a tax-free profit led to Korea basically tearing up its tax treaties because the notion of a foreign fund making money was so abhorrent. ("Eat-and-Run" was coined to describe their horrible practices of rescuing wrecked companies, fixing them up, and then—quelle horreur!—exiting the investment.) And it set the ball rolling toward making Lone Star Public Enemy #1, and a sharp decline in foreign investors’ confidence in doing business with Korea.
One may expect the TPG fund will make a good return in America. The management team made its bones in the savings-and-loan crisis of the early 1990s. They know how to make returns rescuing financial institutions.
The Wheel Turns
Now the wheel has turned, and Korea is the distressed-asset investor. The $300 million of individual Korean retirees’ funds were entrusted to TPG because Korea knows this management group’s track record. But given the moral posturing taken against the foreign “eat-and-run” investment funds and their wicked capitalists, I hope NPS pays all its taxes (and then some) on its investment in the US—and doesn’t tolerate those sharpies at TPG doing anything so “immoral” as structuring anything to lawfully minimize taxes due. Otherwise the irony will be too great.
And perhaps next time, when Korea’s next market crisis happens and the vulture funds come back, there will be a more mature attitude taken—Korea having had the experience of making money as a private-equity investor. (If a loss is incurred, though—look out! And stand by for more denunciation of foreign funds.)
The NPS has announced its intention to invest 15% of assets overseas, so watch for more deals like this in the future.
UPDATE 9:12 p.m.—I am reminded by my associate Ms. In-Kyu Hwang that Korea’s other pile of money, the Korea Investment Corporation, recently invested US$2 billion in Merrill Lynch with much the same objective as NPS’s TPG entrustment. And serendipitously, she has a short piece in our firm’s Korea Herald column today on the topic of Korea’s move into the sovereign wealth fund sphere:
KOREA’S SOVEREIGN WEALTH FUND
Korea Herald, March 6, 2008by In-Kyu Hwang
The subprime crisis in the United States has had the secondary effect of focusing a lot of attention on sovereign wealth funds, as several have invested in some of America’s largest banks in order to help them through this tough period. One of these funds, the Korea Investment Corporation, or KIC, entered the spotlight by investing $2 billion in preferred shares of Merrill Lynch on Jan. 15.
Accordingly, by purchasing 3.1% of Merrill Lynch, the KIC became the second-biggest shareholder after Temasek Holdings, an investment company owned by the government of Singapore.
The KIC, as the first and only sovereign wealth fund in Korea, was established under the Korea Investment Corporation Act on July 1, 2005 in order to control foreign exchange effectively and raise the global competitiveness of the local financial market by using some of the country’s foreign currency reserves of over $200 billion.
Under the KICA, the president and CEO of the KIC is responsible for supervising the overall affairs of KIC, while a steering committee—composed of the president/CEO, the Minister of Finance and Economy, the governor of the Bank of Korea and six nongovernmental delegates—has the authority to decide on the corporation’s affairs, and the auditor of the KIC conducts independent inspections. Also, the KIC is entrusted with assets by the government, the Bank of Korea and/or government fund managers as defined under the Framework Act on Fund Management. The target assets for investment are limited to the securities prescribed in the Securities and Exchange Act, foreign exchange and derivative transactions as listed in the Foreign Exchange Transaction Act and the deposit of money in internal and external banking facilities and the sale and purchase of real estate.
Currently, the KIC is entrusted with $17 billion of foreign currency reserves from the Bank of Korea and $3 billion of foreign exchange equalization funds from the Ministry of Finance and Economy. The KIC is expected to get a foothold in the diversification of investment returns and knowledge about global asset management through its investment in Merrill Lynch.
However, as the KIC has the character of a public institution with restrictive financial resources and target assets, it is distinguished from the sovereign wealth funds of other countries, including Temasek, of which investment activities are less restricted.
With the new administration of Lee Myung-bak and increased international scrutiny of sovereign wealth funds in light of recent high-profile investments, the KIC faces three challenges. One issue is whether or not the KIC or newly created sovereign wealth funds should be opened to private fund investment. The second issue is how to manage the KIC’s exposure to risk, especially considering large investments in companies with exposure to the sub-prime crisis. And the final issue is how to cope with the movement for increased restrictions and controls placed by advanced countries and international organizations on the KIC as a result of the explosion of investment in the assets of advanced countries by Asian sovereign wealth funds recently.
Happy Taxpayers Day
by Brendon Carr
Here’s something you probably didn’t know: Today is Taxpayers’ Day in Korea. I’m not sure what kind of celebrations are held to mark the occasion of Taxpayers’ Day, but it’s good to know the government is thinking of us.
Coincident with Taxpayers’ Day, the Maekyung Ilbo reports that Lee Myung-bak’s team is thinking about a tax-cutting agenda:
Strategic Planning and Finance Minister Kang Man-su stated on March 2 in his speech commemorating Taxpayers’ Day, “More than anything else, bold taxation reformations will be initially promoted. Along with a graduate reduction of corporate tax rates, consolidated tax return policy will also be introduced.”
[MSPF Tax Policy Chief Huh Yong-seok] revealed, “International competition to cut taxes is extremely stressful. Close eye is kept on tax reduction plans of Asian competitors: China, Taiwan, Hong Kong and Singapore.” He added, “Taiwan’s corporate tax rate will be down by 15 percent by year 2010 and China, Hong Kong and Singapore are also following suit to lower their corporate tax rates. Korea’s corporate tax must meet that of Taiwan’s level.” The Taxation Policy Chief said, “Korea’s tax burden rate may be lower than the OECD average but is still high compared to its Asian neighbors.”
Corporate tax rates are relatively high: The first W100 million of net profit is taxed at 14.3% (basic tax rate 13% payable to the central government plus a surtax of 1.3% payable to the local government), but everything thereafter is taxed at 27.5% (25% + 2.5%). There is not much progressivity to the Korean corporate-tax regime, something the government might look to implement if there is pressure not to lower the basic tax rate.
In 2000, the corporate tax rate was 30.8%, so the current rate represents about a 10% cut from that. If Korea matches Taiwan’s tax reduction, we might in 2010 be seeing an effective corporate tax of just around 23%. Tax cuts work to stimulate economic growth. Dare LMB’s team go lower? The MK story hints at some objective of a 5% corporate-tax rate…
Mess with the Bull, Get the Horns, Son!
by Brendon Carr
UPDATE 4 MARCH 2008: There was a post here in which I let my testosterone get the better of me. After speaking with the party about whom it pertained, I’m no longer interested in conflict with him. We have differences of opinion concerning the validity of my allegations, but I concede that on some of the issues he has a different perspective than me. We do not agree on everything, but the fact is both of us—me moreso than him—got carried away with personal attacks.
So here it is—I don’t want to fan the flames any longer. Therefore, this post is removed, and comments left—although appreciated—are being deleted.
Hurray! LMB’s Labor Minister Suggests Rational Reforms
by Brendon Carr
Apparently having survived his background-check scare, President Lee Myung-bak’s new Minister of Labor Lee Young-Hee declared his intention for a new labor-management relations paradigm: Management will no longer be denied by the state the benefit of the protection of law.
The Dong-A Ilbo’s English edition reports on an interview with Lee:
...Lee said, I have not considered the dispatch of public security to the sites of labor-management disputes, but my position is that violators of the law should certainly be held responsible.
Just as President Lee Myung-bak was a role model by accepting a special probe and being investigated himself, the law should be accepted by powerful people and labor activists without exception, he said. It seems that those in the labor community have the notion that the law is not important and a thing of previous authoritative (sic) regimes.
This is profound news, if Labor Minister Lee can actually carry out this intention. Lack of legal protection for management in trade-union disputes has been a glaring irritant to Korean conglomerates and foreign investors alike, and has led to capital flight as Korean companies invest elsewhere while foreign investors decide to bypass the country altogether.
Lee’s final statement agrees with a thesis of mine: Korea’s government is sometimes tentative in its enforcement of certain laws (traffic and labor-management relations are standouts) because of a deep-seated insecurity over the fact that past authoritarian governments have not had much political legitimacy. It’s been fashionable in the last 10 years to bash Korea’s laws as a tool of oppression while at the same time abusing the law as a tool of oppression—thus undermining rule of law. Roh Moo Hyun has been particularly obnoxious in this regard. As a lawyer I consider this trait of Roh’s the worst of his many, many faults.
My University of Washington law-school Professor John Haley (now at Washington University in St. Louis) wrote a book about the Japanese legal system which he titled Authority Without Power: Law and the Japanese Paradox (highly recommended); he kindly dropped in on my office one day when he visited Korea and we discussed whether I should write my own book about this country, which I would title Power Without Authority as a tip of the hat to Prof. Haley. That’s something I haven’t gotten around to doing, which means there’s probably someone else who will take that excellent title. (I have my own idea who would do it to me, too.)
Back on topic: Lee additionally addressed, albeit gingerly given the third-rail aspect of Korea’s “just cause” employment-security protection, the need to introduce more flexibility to the employment system. Lack of flexibility, in particular the inability to lawfully terminate most regular employment relationships, is a millstone around the necks of Korean employers. It has also produced a large underclass of workers on short-term (less than two years) temporary employment contracts, who don’t have any form of career path because employers don’t want to be stuck with them for life.
The Labor Minister’s suggestion of longer-term (four or five years, he says) temporary contracts probably isn’t the solution. The solution to flexibility, in my opinion, is to dump the current interpretation of “just cause” in favor of a more rational standard of “at-will” employment tempered by some reasonable restrictions.
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