Malaysian Companies, Residents Look to Korea's Past as a Guide

SEOUL, South Korea -- Suddenly, Malaysian companies and residents must learn how to live with strict capital controls. For an idea of what life could be like from now on, they can take a look at South Korea, which for years was one of Asia's most closed capital markets.

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Until the government started easing the controls over the past several years, Koreans faced onerous restrictions. Most Koreans weren't free to take dollars out of the country; companies and residents couldn't freely borrow from overseas; and any company or resident bringing foreign exchange into the country had to immediately convert it into won. The country's stock market was opened to foreign investors only in 1992.

The government justified the restrictions by citing the country's low level of dollar reserves -- though critics argued that the restrictions kept dollars out. The government allocated the few dollars it had to the companies it thought would "contribute most to the country's economic development," according to a finance ministry official.

Life Under the Controls

For companies that didn't meet the criteria, business was tough. Take Cho Pil Je's coffee-making business during the 1970s. Coffee was a novelty at the time for Koreans, and still considered a luxury. When Mr. Cho, who was vice president of a coffee brewer named Dongsuh Foods, tried to import coffee beans from Africa and South America, he had to get numerous approvals from the government. The company couldn't exceed a government-imposed import quota and had to deposit in a bank an amount equal to three times the price of the coffee beans he was importing.

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"The government did all that it could to minimize our imports," he said. What's more, the government later launched an anticoffee-drinking campaign to minimize imports, and thus, save dollars.

Despite the red tape and the tight curbs, South Korea's economy turned in some phenomenally high growth rates over the years. But damming up capital flows fostered many problems; some contributed to the country's economic crisis that began nearly a year ago.

For one thing, resources were allocated very unevenly as the demand for dollars far outstripped the supply. That, in turn, led to corruption and created inefficient industries, economists say, as businessmen cut corners to get foreign exchange, and a company's growth often owed more to its connections than to business acumen. "Only big businesses with political connections had access to the resources," said Kim Jong Seok, an economist at Hong Ik University in Seoul, "and the fat got fatter."

Heavy Industry Was a Priority

Chung Hae Bum, an official who has been at the Ministry of Finance and Economy for about five years, disagrees. South Korea "did have a lot of restrictions on capital flows," he says, but given the limited supply of dollars, only those that needed dollars urgently got them. "We put a priority on heavy industries, simply because they were our biggest exporters," he says.

Now that the government has lifted many restrictions, including scrapping the daily dollar/won trading band and allowing the establishment of money-changing venues other than banks throughout the country, Mr. Chung said his workload has increased. "A freer flow of money makes post-supervision more important," he said.

The foreign-exchange controls didn't just aggravate companies. They also put individual financial dealings under scrutiny. A few years ago, Kim Ki Hwan got a phone call from his bank, demanding to know why he had spent $5,000 during a trip to the U.S. Annoyed, the 68-year-old former government official just laughed it off.

Among other restrictions, Koreans traveling abroad aren't allowed to take more than $10,000 in cash when leaving the country. And every foreign-exchange transaction requires the person to produce a passport so the bank teller can record the amount; that's partly to prevent people from making frequent trips just to get a lot of dollars out of the country. "Only the shadiest types of foreign-exchange trading should be regulated," said Mr. Kim, the former official.

Like Mr. Kim, Professor Kim also recalls getting a phone call from his bank for spending more than $5,000 in credit card purchases a few years ago. He got off the hook because, like Mr. Kim, he had spent most of the money for lodging and meals, which were considered acceptable expenses by the government.


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