A recent survey of the South Korean economy in the Economist Magazine discussed a miscalculation of the largest of South Korea’s companies, or chaebol: They calculated come the Asian Financial crisis of 1997-98 that they were too big to fail, that the government would bail them out of hyper-leveraged Hell they had created for themselves. “They were spectacularly wrong,” The Economist writes. “The conglomerates failed in droves. The collapse of Daewoo in 1999 was followed by the bankruptcy of more than half the then top 30 conglomerates.” The government also gave jail sentences to CEOs and family members.

Since that time, many of the guilty have been pardoned, and balance sheets and corporate governance have become less complex, more transparent. Now, South Korea comes out of the Great Recession more competitive than any other Asian nation – including China, the banks of which have created a 1990s style environment of high leverage and low accountability. Most of the money lent to the State-Owned Enterprises (SOEs) went into real estate speculation and the stock market to support opaque, hyper-complex cross-holdings; not into new product lines and R&D. Meanwhile, Japan seems immobilized by the cemented relationships between its keiretsu, its mordant bureaucracy and its clueless government, all mired in the highest debt-to-GDP ratio of the rich countries.

I’m betting that when loans handed out to SOEs come due the central government will cover the bill, just as they had ten years before when they privatized many of the least competitive SOEs. Without the incentive to be competitive, Chinese SOEs will still remain bloated and uncompetitive on the world stage. Actually, I think the “captains” of those industries will actually be just fine with that.

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