Stalled Miracle

South Korea's economy isn't nearly as strong as you might think.

Once again, North Korea is grabbing global headlines by threatening aggression against its neighbor to the south and the United States. And once again, South Koreans are largely shrugging off the rhetoric from the north.

This nonchalance gives South Koreans the chance to focus on another existential threat -- one that's not so easily dismissed as bluster. South Korea's economic success -- the growth formula that brought forth the "miracle on the Han," set records for development, and is a model for other emerging economies -- is no longer working for a great many Koreans. The nation is beset by a deep middle-class malaise that could limit the consumer spending needed to create a more balanced economy and might eventually limit gross domestic product growth itself.

Yes, the government-backed programs to build up export-oriented manufacturing still produce results: South Korea leads in memory chips, LCD displays, and mobile phones; its multinationals such as Samsung, LG, and Hyundai are taking a larger share of global markets. But the typical middle-income Korean is increasingly left behind. As giant manufacturing concerns expand overseas, they are cutting employment at home, leaving job creation to the nation's small and medium-sized enterprises (SMEs) and service industries. In contrast to South Korean manufacturing firms, most of these companies are far from world-class competitors. They have much lower productivity and offer substantially lower pay.

In South Korea, over half of middle-income citizens (households making 50 percent to 150 percent of the median wage of $37,000) are paying out more each month than they bring in. South Korea's household saving rate has plunged from one of the world's highest (19 percent) to one of the lowest in advanced economies (4 percent). It has the highest suicide rate among nations in the Organisation for Economic Co-operation and Development (OECD) and one of the world's lowest fertility rates. Today, South Korea faces a war on two fronts: the prospect of a shrinking labor force along with a rapidly aging population.

Complicating matters, middle-income South Koreans are reluctant to adapt to the new reality. Women continue to drop out of the labor force to raise children (only 44 percent of Korean families have two wage earners, compared with 57 percent across the OECD), while families continue to pay a disproportionate share of income for two obsessive priorities: home ownership and education.

A new South Korean growth formula is necessary to chart the continued trajectory toward a successful and prosperous future. To relieve the strain on middle-income households caused by perverse spending priorities and create new well-paying jobs by bolstering the service economy and SMEs, the government must first attack housing costs. House payments are particularly burdensome in South Korea because most mortgages are of short duration (10 years or less) and loan-to-value (LTV) limits are tight (most mortgages are for about 50 percent of home value). While these LTV limits have protected the banking sector, they force borrowers to take out additional high-interest loans to make their home purchases. Simply by raising LTV limits and rolling those loans into larger mortgages, South Koreans could save $8 billion a year, according to our analysis. The government has already set a goal for increasing high-LTV loans, but more can be done. Other tactics would include encouraging a more robust rental market by allowing more investors (such as insurance companies) into that sector and encouraging competition that would raise the quality of rental housing.

Getting South Koreans to stand down from their education arms race will not be easy. Despite growing evidence to the contrary -- unemployment is higher for college graduates than for vocational-school grads, for example -- Koreans cling to the belief that the university degree is the only ticket to success. South Korea needs to invest more in vocational education; it should expand its new Meister high school system, a transplanted German idea to invest in schools that provide job-specific training and a path to employment. Eventually, parents will see that there is a choice.

South Korea can also do more to build up services and SMEs. In addition to building on the success of sectors such as construction engineering that are already globally competitive, South Korea can expand sectors such as health care, tourism, and financial services. In health care, South Korea has both opportunity and need. It spends just 6.9 percent of GDP on health-care services, compared with 9.6 percent in the average OECD nation, but it has a rapidly aging population that will raise demand. In particular, South Korea can expand primary care to treat patients with chronic conditions, including the elderly.

Finally, to build up SMEs, South Korea must reduce barriers to growth and try to establish a culture of entrepreneurism. It is ironic in a country dominated by chaebol (the mega-corporations created by master entrepreneurs) that most business owners are risk-averse -- focused only on making a living. But there are structural barriers, too: the chaebol rely heavily on captive suppliers for business services such as IT support, a practice that stifles competition, despite laws aimed at helping small businesses. Other regulations continue to discourage growth: estate-tax rules allow owners to pass on their businesses tax-free, as long as they are below a certain size.

South Korea needs to celebrate and teach entrepreneurism; that means better access to capital, stronger intellectual-property protections, and bankruptcy laws that let entrepreneurs recover from failures. Seoul should recognize that efforts to address these barriers have not gone far enough and should consider a more comprehensive and consistent approach to helping small companies innovate and strive for growth. A new wave of innovation can help build another South Korean miracle -- one that might have China and other rapidly developing economies looking to Seoul for inspiration as they tackle similar challenges in the coming years.

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Have It Their Way

From burgers to Bud Light, America's favorite brands are now owned by foreigners.

It's Saturday night and you want to go see a movie. You fire up your IBM ThinkPad and check the listings. The local AMC theater is showing Iron Man 3, the Marvel Comics blockbuster partly filmed in China. You hop in your Volvo, fill it up with gas, and settle down in your seat with your popcorn.

The latest in the Iron Man series, to be released on May 3, represents a new Hollywood wave: catering to massive Chinese audiences with scenes shot in the Middle Kingdom. But the movie is not the only Chinese element of your Saturday-night scenario.

The IBM ThinkPad you used to check movie times? That's owned by a Chinese company, Lenovo. They bought IBM's PC business in 2005 for $1.75 billion. The theater showing the movie? Also Chinese-owned. The Dalian Wanda Group bought AMC Theatres, America's second largest cinema chain, for $2.6 billion in 2012. The gas that filled up your Volvo? That could come from anywhere, really, but since Canada is America's largest supplier of crude oil, and China National Offshore Oil Company (CNOOC) completed the purchase of Nexen, one of Canada's largest oil and gas producers, in 2013, it may well have been CNOOC gas filling your tank.

OK, so at least you have the Volvo, the very symbol of all things Swedish. Think again. Volvo is owned by Geely, a Chinese state-owned automaker, purchased from Ford Motor Co. for some $1.5 billion in 2010.

Your popcorn, at least, is most likely made from American corn kernels. As for the machine that pops it, well, that could very well be made in China.

Amazingly, a recent poll found that 94 percent of Americans could not name a single Chinese brand. This caused a minor stir in the circles that stir over such things, but it's not the real story. The real story involves Chinese companies -- and others from emerging markets -- making a major push to buy American and Western brands and companies.

Take the recent purchase of The H.J. Heinz Company. What could be more American than Heinz ketchup? It sits in refrigerators and restaurants -- both humble and high-end -- across the land. Its name adorns the stadium of one of the NFL's most storied football franchises, the Pittsburgh Steelers. It's a global American icon, standing alongside the likes of GE, McDonald's, Coca-Cola, and Boeing.

It's no wonder, then, that another American icon, the investor Warren Buffett, would seek a piece of the Heinz story. His firm, Berkshire Hathaway, last month helped finance a $23 billion private equity investment to acquire the company. What could be more American that? The sage of Omaha making a long-term play on a top American brand.

Not so fast. The company leading the purchase of Heinz is a Brazilian private equity firm, 3G. Never heard of it? Well, 3G also happens to own Burger King Corp., which it bought for $3.3 billion in 2010, to considerable success, expanding the franchise's reach and increasing shareholder value.

The 3G takeover of Heinz -- partly financed by Berkshire Hathaway -- is not simply an outlier, a talented group of Brazilian investors who like to buy established brands and wring more profit out of them. It signals a larger trend that has been taking place over the last decade and will accelerate over the next: the rise of emerging-market investors and companies acquiring majority stakes in well-known Western brand names and lesser-known Western companies.

Demographically and by all economic indicators, emerging markets will drive future global growth -- particularly Asia. By the year 2025, nearly two out of every three humans on Earth will live in Asia. Meanwhile, sub-Saharan Africa's population could double by 2036, according to a 2008 World Bank report.

While the eurozone is headed for another year of contraction and advanced economies grow only modestly, emerging markets are expected to see 5.5 percent growth in 2013 and near 6 percent in 2014, according to the IMF. The world's most populous region, East Asia and the Pacific, is also the fastest growing. According to a World Bank report issued Monday, the region contributed 40 percent of global growth in 2012 and can expect to see an average of 7.7 percent growth over the next two years, virtually lapping "OECD-stan." Meanwhile, sub-Saharan Africa continues its upward growth path. The World Bank expects to see solid 5 percent growth through 2013-15. Meanwhile, countries like Sierra Leone, Niger, Côte d'Ivoire, Liberia, Ethiopia, Burkina Faso, and Rwanda continue to rank among the fastest growing in the world.

Wait a minute, you might be saying: I've been reading these headlines for the past two years. But the new story is the rise of emerging market multinationals. As they grow, they are becoming more acquisitive. And they are not just buying well-known Western brands; they are creating some powerful ones of their own. Thus far, the narrative of emerging markets told in the West has been one of investment opportunities -- the BRICS and the search for the next set of up-and-comers -- and shifting economic centers of gravity. Now, it's a story of emerging markets' companies coming to the West.

St. Louis-based Anheuser-Busch knows a thing or two about this trend. In 2008, the Belgian-Brazilian brewer Inbev acquired the American beverage giant. Budweiser, that great American icon and Bud Light, the best-selling beer in the United States, are now owned by a consortium headquartered in Leuven, Belgium and run by a Brazil-born CEO. The deal was engineered by Brazilian billionaire financier Jorge Paulo Lemann, head of 3G Capital. Yes, that 3G Capital, the one who partnered with Warren Buffett to buy H.J. Heinz. From the beer you drink to the burgers you eat to the sauces that flavor your meat and fries, Lemann has a hand in it.

Of course, foreign ownership of American brands is not new. But "foreign" usually meant European. Europe-based multi-nationals and investors already own a bevy of American brands. The names may surprise many Americans: Gerber, Holiday Inn Hotels, Vaseline, Hellman's Mayonnaise, Alka-Seltzer, Ray-Ban, LensCrafters, Lysol, Woolite, Motel 6, Trader Joe's, and on and on. All are owned by European companies. Even the popular television show American Idol -- yes American Idol -- is owned by a Germany-based media conglomerate, Bertelsmann.

Emerging-market investors are now joining the Europeans. China's Lenovo led the way when it purchased IBM's PC business in 2005. The Milwaukee-based Miller Brewing Company is owned by SABMiller, a company launched in South Africa in 1895 (née South Africa Breweries), now based in London, and serving thirsty customers across six continents. While Chrysler Motors is owned by Italy's Fiat, the iconic Chrysler Building in New York City is owned by the Abu Dhabi Investment Council.

Even America's once-impoverished but now surging neighbor to the south, Mexico, has joined the tide. Grupo Bimbo, a Mexico-based food conglomerate, bought the North America bakery operations of cakes maker Sara Lee in 2011. It was even rumored to be eyeing bankrupt Hostess Inc. -- a Mexican company potentially coming to the rescue of the Twinkie. (Hostess was later bought by an American private equity group.)

Perhaps the most honest accounting of this larger trend came from Heinz CEO William Johnson, who told the Wall Street Journal in February: "We've been prospecting in the emerging world for a long time, and now they're prospecting here." This "prospecting" cost Johnson his job. He will soon be replaced by Bernardo Hees, the Brazilian private equity whiz behind Burger King's turnaround -- and a member of the 3G Capital executive team.

Twenty-five years ago, the only non-Europeans buying up Western brands were Japanese. Today, Jaguar and Land Rover, the British auto icons, are now owned by India-based Tata Motors, in a delicious irony of post-colonial economic rejiggering. Since 2005, emerging markets companies have acquired more than 3,100 companies in developed economies, according to KPMG's Emerging Markets International Acquisition Tracker. A full third of the targets have been in the United States -- and Chinese companies have had the most voracious appetite.

But cash-rich emerging-market investors are also building their own world-famous companies. Dubai-based Emirates airline has become a global brand icon while reshaping global aviation, inspiring regional competitors such as Doha-based Qatar Airways and Abu Dhabi-based Etihad Airways. Today, the Persian Gulf "Big Three" carriers plus Turkish Airlines have stolen a march on European aviation powerhouses by cutting into their lucrative long-haul routes to Asia, forcing them to cut costs and shelve growth plans. The European carriers are on the ropes.

Lufthansa, in a recent admission of defeat, noted on its website, "It is a question of time before Europe's connections to other regions will be conducted only via the Gulf states." To fight back against the Gulf Big Three, the German airline, it has been reported, has been eyeing an alliance with Turkish Airlines, the only carrier going toe-to-toe with the Gulf behemoths in route growth. (Irony watch: Turkey may not be good enough for the European Union, but its national airline might be Lufthansa's savior.)

Meanwhile, Brazil's Embraer is the third-largest selling aircraft maker in the world and Vale is a global mining giant. Petrobras of Brazil, Petrochina, Sinopec, and CNOOC of China are all players in their own right in the oil and gas industry. Infosys of India is a global technology giant.

But these are not just headlines from the business pages. Take a walk in any major American urban center and "Emerging Markets, Inc." is everywhere.

Let's stroll down Connecticut Avenue in Northwest Washington D.C. That Godiva shop on the corner, a bastion of Belgian chocolate elegance founded in 1926, is now owned by a Turkish confectionery, purchased in 2007. No cash to buy a chocolate? Walk over to the ATM machine belonging to HSBC, a leading emerging markets bank founded in Hong Kong in 1865.

Need a coffee with that chocolate? Wander over to Caribou Coffee, owned until recently by a Bahrain-based private equity firm. Still hungry? Have lunch at Nando's, a South Africa-based restaurant chain founded in 1987 in a Johannesburg mining town and operating in 25 countries. Nando's plans to open 25 new restaurants across the United States by 2015.

Need to book a flight to Asia? Walk a few blocks to local offices of the Gulf Big Three, all of whom now operate direct flights to their hubs from Washington D.C., and connect to your beach vacation in Phuket or Bali, business trip to Shanghai or Jakarta, or family visit to Mumbai or Colombo, with only one stop. And pay for your entire trip with your China Union Pay credit card, increasingly accepted in the United States and the second-largest credit card company in the world by transaction volume.

The emerging markets tide still has a long way to go. It's not going to end with ketchup.

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