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Lotte drama is an opportunity for South Korea

Moon must seize chance to accelerate chaebol reform

| South Korea

It has been a difficult month for anyone seeking clues to the legal regulation of the South Korea's economy.

As Olympic judges crown champions in Pyeongchang, justices in Seoul are making their own headlines.

On Feb. 5, an appeals court let Samsung head Lee Jae-yong walk free after suspending his five-year bribery sentence. The decision disappointed those who thought Seoul was clamping down on the opaque family-owned giants dominating the economy. Korean history is all too replete with wayward executives getting off easily.

Eight days later, the judiciary comforted reformists by sending Shin Dong-bin, chairman of Lotte Group, to prison for 30 months. The stiffer-than-expected sentence for a $6.5 million bribe smacked of one court rebuking another for leniency.

And the public response to the rulings -- a backlash over Lee's release, delight over Shin's imprisonment -- could be just the rallying point that focuses President Moon Jae-in on bringing Korea's chaebol to heel.

Lee and Shin, after all, are human bookmarks of sorts. Both were jailed for currying favor with Moon's predecessor, Park Geun-hye. The bribery for which both scions of business empires were convicted helped get the heir to a political dynasty -- Park is the daughter of dictator Park Chung-hee -- impeached, removed from office and later taken into custody while prosecutors probed the allegations against her. Lee was sentenced in August, before Moon began taking on the chaebol; Shin after.

So far, Moon has been slow to curb the monopolies and excesses of Samsung, Lotte, LG, Hyundai, Daewoo and other behemoths hogging Korea's economic oxygen. Since the 1997 Asian crisis, every president pledged to make more space for small-to-midsize enterprises and catalyze a startup boom to create good-paying jobs and hone competitiveness. Each backed off after learning just how hard it is to tell where the public sector ends and the private begins. Rather than risk destabilizing Korea Inc., leaders from Kim Dae-jung (1998-2003) to Park (2013-2017) asked the chaebol to help generate growth, deepening their role.

Moon, a former human-rights lawyer, was elected to democratize the economy once for all. In December, he made a symbolically important down payment: Korea's first corporate tax hike since 1991. At the same moment President Donald Trump was slashing U.S. levies, Moon's team raised rates on Korea's biggest-earning companies to 25% from 22%.

Since then, Moon has been preoccupied with his North Korea detente. Hence the Pyeongchang Games are as much about political intrigue as sport. But the serendipitous court rulings in Seoul are a timely reminder of what brought him to power -- and what he can control. Odds are, the North-South lovefest in Pyeongchang will prove fleeting once North Korean leader Kim Jong Un and Trump return to trading barbs. Moon cannot control whether Kim follows up on the goodwill his sister and Kim Young-nam, North Korea's ceremonial head of state, generated in recent days. What he can control, though, is the structure of a domestic economy that is working for too few households.

Lotte's plight is instructive because it has been battered by multiple headwinds bearing down on Asia's fourth-biggest economy. Not only is the retail-to-chemicals giant embroiled in a domestic official corruption case. It also finds itself a pawn in geopolitical wrangling between Beijing and Washington, and the subject of a public family feud as 63-year-old Shin and his older brother battle for control of a company founded by their 95-year-old father.

The conglomerate's China saga began 12 months ago when it offered land in Korea -- a golf course -- to host a U.S. military defense system. Beijing's retaliation included barring tour groups from visiting Korea and shuttering Lotte convenience stores and supermarkets on the mainland. This has made it near impossible for the Shin family to offload its Lotte Mart retail chain. Five months after hiring Goldman Sachs for a sale, no buyers.

The battle between the Shin brothers, meantime, is a reminder of the dangers of a major economy being subject to the whims of a handful of unpredictable families. A decision to the pull the IPO of the group's hotels business in late 2016 was a case in point. The proceeds of the $4.5 billion offering were aimed at expanding Lotte's global mergers-and-acquisitions firepower and new research and development. The deal's postponement shook confidence in the broader Kospi stock index.

In the early 2000s, a Chung family feud saw the Hyundai industrial empire splintered into three parts. The market-slamming spectacle reminded Koreans how far they needed to travel to move beyond 1997. And here we are in 2018 with additional reminders that all too much of "old Korea" stands in the way of Moon's pledged shock therapy.

Samsung's leadership, it is important to remember, is seriously incapacitated. While Lee, 49, is now free, his father, Lee Kun-hee, is still chairman, even though he has been lying sick in a Seoul hospital since May 2014. Lee Kun-hee himself walked away from a conviction for tax evasion in 2009 -- when a suspended three-year prison sentence was followed by a presidential pardon.

Samsung matters because it alone generates revenues comparable to more than 20% of gross domestic product. Lotte, even more than the very international Samsung, is a Korea Inc. microcosm.

This judicial drama demands that Seoul must now redouble efforts to rebalance Korea. With Moon's presidency at the nine-month mark, his team should harness the anti-chaebol mood and implement his "trickle-up growth" plan.

Korea is anything but a basket case; it is seen growth 3% this year. But with youth unemployment at 9.3% and household debt near record levels, Moon must do much more than raise the minimum wage and add 175,000 or so government jobs. Twenty years after the Asian crisis, Korea is still too much about protecting jobs and income at the top of economic system, not enough about generating new energy from the ground up.

Too often, that means tolerating the insular motives of a handful of billionaire families with outsized influence. Moon can take on these empires by supporting startups and small-to-medium-size businesses with tax incentives, creating a more level playing field and building new safety nets to encourage greater risk-taking among Korea's 50 million people.

Reining in the chaebol requires wrestling power away from the Lees, Shins and other chaebol scions. That means new anti-monopoly regulations, stepped up antitrust enforcement, higher taxes on the super-rich, crackdowns on takeover defenses, penalties for cross-shareholdings, greater scrutiny of internal mergers that enrich families at the expense of shareholders, mandating more outside directors, and new checks and balances on tycoons passing CEO and chairman jobs to their children and grandfathers.

This birthright model has no place in 2018, and its durability is costing Korea points on the global stage. It is time Moon got serious about cleaning up Seoul's economic game.

William Pesek is a Tokyo-based journalist and author of "Japanization: What the World Can Learn from Japan's Lost Decades." He has written for Bloomberg and Barron's.

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