Inclusive and Sustainable Development - International Economic Law Nexus

環境と人間の為、法律と経済を一つの因果関係で繋げる。インクルーシブで持続可能な発展-国際経済法ネクセス(ISD-IEL Nexus)における文書。

Public Interest and Investment Climate Conflicts in Korea and Japan

(Original version of Asia-Pacific Circle article)

Despite the extent of their economic integration and attempts to penetrate the corporate veil, the Japanese and South Korean governments have shown that they continue to share a resilient bond with business. While they are far fewer than in the heydays of rapid economic expansion, when interventions happen they are hard to miss. From banks to shipyards and technology industries, Japan and Korea have stepped into the business realm at multiple occasions in the name of the public interest. While silently applauded by business executives and implemented in the name of saving jobs, these interventions occasionally lead to international legal dispute and raises an important question: when will these governments claim their right to regulate in the public interest and how does that uncertainty impact the investment climate of two of Asia's main economies?

 Recent developments

Over 2017 and 2018, the Republic of Korea (ROK) made policy interventions through fiscal policy and legislation. This happened recently in March 2018 with General Motors (GM) threatening to withdraw its investments in Korea, shutting down its manufacturing plants in the country. GM Korea has long been underperforming both financially and in terms of production due to a rather stark combination of corporate indebtedness and poor financial management. Shutting down its factories, such as the one in Gunsan, would result in the termination of 16,000 workers, most of who have yet to receive their wages. The country was divided on whether the government should intervene. To intervene would essentially reward GM for its poor management practices in Korea using public finance while doing nothing would mean that the burden would fall almost entirely on the workers in the afflicted areas. Through long and contentious debates, the Korea Development Bank, a policy bank, decided to enlarge its original investment in GM Korea by $750 million in exchange for, amongst other things, a 10-year presence commitment in the country.

Yet this only drew more attention to a stubborn debilitation of historically key sectors in Korea’s manufacturing base. The ROK intervened in GM not because it wanted to maintain the investment, but because the province that the company had its plants were already enfeebled economically. This is when the ROK in May 2018 followed up by identifying five regions as industrial crisis zones, which would receive tax and hiring incentives.

Key interventions in Korea and Japan

The heavy hand of the ROK and Japanese government have not always bode well. The ROK was brought summoned to international tribunals over the last decade because of its interventionist habits. More recently, in 2017, Japan faced the same challenge after stepping into the sale of Toshiba Memory.

Korea, Korea Exchange Bank and Lone Star Funds

During a period of financial instability in Korea, Lone Star Funds (LSF), an American private equity firm, acquired a majority stake in Korea Exchange Bank (KEB). As the economy recovered, LSF attempted to sell its shares from early 2006. Until 2012, however, no transaction succeeded because the Korean government delayed approval of the sale under claims of on-going prudential and tax investigations.

LSF pursued legal action against the ROK in 2012 on grounds that it was subject to “repeated acts of harassment” as well as “arbitrary and contradictory tax assessments”. The ROK argued in its defence that the sale of a domestic financial institution as large as KEB would not only have resulted in considerable non-cyclical impacts to employment, but also would leave the domestic financial industry in disarray.

Japan, Toshiba Memory and Western Digital

Arising from complicated interactions through a joint venture agreement, Toshiba decided to sell Toshiba Memory Corporation without consent from Western Digital in mid-2017. While Western Digital sought international arbitration, Toshiba was attempting to expedite the sale to avoid its delisting from the Tokyo Stock Exchange - a typical step toward bankruptcy as shareholders then prepare to unload their assets before prices dwindle and financial institutions seek loan repayments. While the sale attracted competitive offers from foreign bidders including Hon Hai Precision Industry, a State-backed consortium was tapped as the preferred bidder. The Innovation Network Corporation of Japan (INCJ), a government-backed policy fund that invests in electronics and technology projects, was at the core of the consortium.

The Japanese government made no mystery as to the need to keep Toshiba’s memory technology and business inside Japan. A government spokesperson, in fact, explained that the decision to push the consortium acquisition forward was made in the public interest, namely to protect jobs and Toshiba technology. Given the keiretsu business structure of Japanese conglomerates like Toshiba's, the impact of a delisting could have traveled across a wide network of interlinked subsidiary and affiliated businesses. As such, the acquisition of Toshiba Memory by a foreign investor could have had a deep impact on the very fabric of the society, economy, and thus the public interest.

From public interest preservation to business climate damages

Few may be surprised with the idea of preventing a significant part of a 140+ year-old company be sold off to rivals who would gladly see to Toshiba’s extinction or with the idea of preventing the sale of a bank should the move destabilize a domestic financial system. While at first sight, public intervention in the economy seems relevant if not important to preserve the public interest, the two cases identified above demonstrate that such actions are not without consequence. Each government assessed their respective decisions as being legitimate within the scope of public interests and of legitimate concern within the scope of international law. Governments have a right to regulate to preserve that public interest.

While arising from a substantive policy issues, the legitimacy of a government intervention is ultimately decided from a procedural aspect that can easily shift matters of public interest to obstacles in business and investment climates. Despite good faith and apparent necessity, such actions can conflict with maintaining a predictable and consistent regulatory landscape for investors – even in economies that enjoy high, stable credit ratings such as those of South Korea and Japan.

The End of an Act and an Era? South Korea’s Corporate Restructuring Act

(Original version of Asia-Pacific Circle article)

Industrial planning by super ministries during periods of rapid industrialization and economic growth is a common feature in the South Korean, and before that, the Japanese economies. In addition to christening a development model that captivated the world, it planted deeply rooted ties between the government and businesses.

On 2018 June 30, the Corporate Restructuring Promotion Act (heretofore, the “Act”), one of the key pieces of legislation holding up the bond between the Republic of Korea (ROK) and its conglomerates (chaebol), expired. In its martyrdom, it mired ROK finance officials and opposition party members in the National Assembly in a contentious debate regarding the future of the government’s role in business. The Act served as the legal basis for the government and business to enter into a workout agreement, even if the latter already defaulted. This allowed firms to renegotiate terms of their corporate liabilities to avoid bankruptcy, liquidation and/or foreclosure.

Keeping up the Act

Finance ministers and officials in the majority party, as well as considerable representation from the private sector, pushed a motion through the National Assembly calling for the reinstitution of the Act. Their argument has been that the current state of the Korean economy requires workout options to prevent exacerbating already record low levels of youth employment; only 42% of the people between 15-29 years-old are employed.[1]

In addition to dwindling youth employment, another motivation behind the reinstitution of the Act includes prolonged recession in the shipbuilding and marine industry. That the government would take an involved role in this industry with the motive of bolstering socioeconomic development was clear from the start of the Moon Jae-in Administration when he acted upon the legal basis provided by the Act to shore up two large shipbuilders: Sungdong Shipbuilding & Marine Engineering Co. and STX Offshore & Shipbuildng Co., Ltd. Yet President Moon represents a shift in direction from past presidencies, which would maintain a more traditional stance of publicly financing shipbuilding firms despite their being zombie companies. The legitimacy of these actions were that they are historically strategic sectors and that allowing these firms to fall into bankruptcy would result in considerable financial fallout for shareholders – the majority holder being the Korean Exim Bank.

More recently, in 2018 May, the government released a more ambitious plan. It identified five regions in Korea to benefit from public support programs including tax exemptions and reductions, financial support, and infrastructure development. Many of the workers in these areas fell victim to cyclical or structural unemployment following dismal economic performance in manufacturing sectors.


Figure 1. Five special industrial crisis response zones, source: author’s illustration

Notable about this most recent use of corporate restructuring is that it also included General Motors and its Korea GM manufacturing plants. The Korea Development Bank, a policy bank, doubled its investment in Korea GM as part of a negotiated debt-restructuring plan. While investigations into Korea GM found that many of its financial woes originated from mismanagement, accounting and transparency issues, the government decided to move ahead with reshoring Korea GM given its anticipated spillover impacts in already economically distressed provinces of the country.

Prologue to the Act

The Act was introduced in 2001 September, empowering the government to insulate domestic firms against the impacts of the 1997 Asian Financial Crisis. During that period, a tremendous wave of insolvencies haemorrhaged throughout the economy as foreign currency loans became nonperforming with the introduction of a floating currency. The powers provisioned by the Act were extended five times and served as a vehicle to push forward strategic sectors with public finance.


Figure 2. GDP growth v Corporate debt, 1999-2017, source: World Bank and OECD

As illustrated in Figure 2, slowing performance in the economy was largely been aligned with periods of falling corporate debt as per cent of GDP. These periods incentivized the government was to implement restructuring measures on the basis of the Act on three occasions: (1) 2001-2005, (2) 2007-2010 and (3) 2011-2013. Two additional implementation periods took place in 2014-2015 and 2016-2018 aimed at industry-specific measures in shipbuilding and steel production.

The Epilogue?

If the government withdraws the legal basis upon which businesses are able to restructure their debt under government management, then it means that it will be left up to these entities themselves to refinance or go insolvent. That being said, however, even if the government were to withdraw its role in saving these sectors, they will look to modes of finance that can further destabilize the Korean financial system. The Bank of Korea (BOK) showed in its Financial Stability Report (2018 March) that 3,216 highly indebted companies in Korea reached a 100% interest coverage ratio and that 365 of those companies have not been profitable for seven years. These firms have been looking to extend their credit with commercial banks and when that option is unavailable resort to nonfinancial intermediaries, such as “savings banks”, for high interest loans. This has been a critical financial challenge for Korea as nonperforming loans and distress in debt service ratios (DSR) have been showing historic rises, which are further aggravated by increasing policy interest rates in the United States.

The combination of risk-taking firm-level behaviour, public interest objectives and structural features of the Korean economy illustrates that corporate restructuring is deeply ingrained. While coming at costs and arguably self-perpetuating, corporate restructuring has been a determining factor behind Korea’s dynamic growth and continues to forecast long-run gains.[2]

 Opposition party members argue that the Act serves as a springboard for government intervention in business, ultimately blocking the structural adjustment necessary to remain competitive. Whether this ongoing political row results in a curtain call for the Act is uncertain, but it brings up a slightly metaphysical question for Korean economic policy: what should be its role?


[1] “2018 March Employment Trends” (in Korean), Statistics Korea, 2018 April 11. Available at:

[2] See, for instance, Chung, Jae and Ratnovski, Lev. “Benefits and Costs of Corporate Debt Restructuring: An Estimation for Korea.” IMF Working Paper 16/204 (2016).

Introducing the ISD-IEL Nexus

Through this blog, I will share my progress in exploring what I identify as a “nexus” between two dynamics: (1) inclusive growth and sustainable development and (2) international economic law. Measuring this nexus and studying its characteristics involves identifying the extent to which these concepts interact with and define one another.

Inclusive growth and sustainable development, or simply inclusive and sustainable development (ISD), finds definition through the considerable attention that it has been receiving from international organizations like the United Nations. The body of materials that primarily shapes its conceptual framework of ISD has expanded and evolved over time to reflect not only new scientific discovery and technology, but also shifting perspectives and ethos on persistent challenges such climate change, demographic transition and expansion, and inequity.

International economic law (IEL) includes a fairly diverse range of legal fields, though in my work I tended to focus primarily on international trade, investment, and finance. The range of instruments the constitute each of these fields also represents a fairly wide spectrum, though its general arc tends to centre around regulatory predictability in transactions, investments, and/or liabilities and taxation. The harmonization of this regulatory predictability has been a dominant trend in IEL, seeking to empower economies to engage in world markets.

Over the series of posts and articles discussed and reflected through this blog, I hope to share my findings, ideas, and observations over my study of the ISD-IEL nexus to offer others who may be interested a chance to discover this fascinating aspect of both development and international law.

L, S-H.