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South Korea has been an independent kingdom for much of the country’s long history. As a result of the Russo-Japanese War, Korea was occupied by Japan in 1905, and five years later Japan formally annexed the entire peninsula. Korea regained its independence in 1945, following the surrender of Japan to the United States after the end of World War II.
NORTH & SOUTH. A democratic government (Republic of Korea, ROK) was established in the southern peninsula while a communist government was established in the north (Democratic People’s Republic of Korea, DPRK). During the Korean War (1950–1953), US troops and UN forces fought alongside the ROK to defend South Korea from the DPRK invasion backed by China and the Soviet Union. In 1953, the peninsula was divided along the demilitarizing zone at 38 degrees latitude. Both countries slowly began to rebuild everything that had been destroyed in the war.
PARK CHUN-HEE. In a coup in 1961, the military Park Chun-Hee took over the leadership of South Korea from what many considered weak and corrupt leaders. Park pursued a quasi-democracy but managed to retain US support. Under Park’s regime, from 1961 to 1979, development was strong but volatile.
GOVERNMENTS VISABLE HAND & CHAEBOLS. Park’s regime enabled a successful system with close government and business operations as well as targeted credit and import restrictions. The government promoted the import of raw materials and technology over consumer goods. They encouraged savings and investment over consumption. During the Park era, companies such as Posco, Samsung, Hyundai, Daewoo and LG were born. These power companies are called Chaebols.
ASIA CRISIS IN THE LATE 90’S. The Asian financial crisis of 1997–1998 revealed weaknesses in South Korea’s development model, which at that time had massive short-term foreign currency loans. GDP decreased by 6.9% in 1998 but recovered by 9% in 1999–2000. The state pressured all chaebols to strengthen their balance sheets. The owner families did not want to lose control and solved this by issuing voteless preference shares (only difference from ordinary shares is that they have no voting value). Today, there are a lot of listed preference shares, most of which emerged from the Asian financial crisis in 1997.
”In the case of Korea, a lot of companies have preferred securities, and in many cases they are trading at 50% of common stock. There are hundreds of these preferreds” – Mohnish Pabrai, 2014
SOUTH KOREA IN THE 21ST CENTURY. South Korea adopted a series of economic reforms after the crisis, including increased openness to foreign investment and imports. The economy grew by 4% annually between 2003 and 2007. However, South Korea’s export-focused economy was hit hard by the global economic downturn in 2008, but recovered rapidly in the following years and reached a growth of 6.3% in 2010. The US and South Korea signed a free trade agreement in 2012. The long-term challenges of the South Korean economy include a rapidly aging population, a rigid labor market and strong dependence on exports (account for half of GDP).
RELAXED VIEW ON RETURNS. A peculiarity of South Korean companies is that they don’t focus on return on capital (especially not after the Asian crisis). As in Japan, ROE has over time been significantly lower than in the West. They also have some of the lowest dividend yield levels in the world. As a rule, it is the controlling shareholder who controls and minorities rarely have anything to say. As in Japan, shareholder activism in South Korea is extremely rare.
RAGS TO RICHES. In the 1960s, after the Korean War, South Korea was poorer than Bolivia and Mozambique, with GDP per capita on a par with the poorest countries in Africa and Asia. In 2004, South Korea joined the world economy’s ‘trillion-dollar club’ and is currently the world’s 12th largest economy . This has been achieved through global integration to make the country a high-tech economy. The country held its first free presidential election under a revised democratic constitution in 1987 in which the younger ROK general Roh Tae-Woon won by a small margin. In 1993, Kim Young-Sam (1993–1998) became South Korea’s first civilian president. In 2017, South Korea is a fully functioning modern democracy where the rule of law and property rights are respected.
WARREN BUFFETT ON SOUTH KOREA. In 2005, Citicorp sent a compilation of South Korean shares to Warren Buffett. He saw a plethora of cheap companies and has described this as “reliving my youth”. He invested $100m of his private money in a basket of 20 cheap Korean companies and said ”If I’d been running a little partnership three years ago, I’d have started 100% in Korea”.