South Korea is indeed racing into the digital age at break-neck speed. The country has one of the highest Internet penetration rates in the world, one of the most advanced broadband and wireless infrastructures, some of the most-visited horizontal portals, a high volume of cyber-trading and a rapidly developing IT venture industry. At the same time, restructuring of the old economy appears to be loosing steam.

On the positive side, large conglomerates are in the process of placing clearer boundaries around their different businesses and defining their economic activities with separate balance sheets. Accounting practices are slowly but steadily improving thanks to pressure placed on external auditors and the tightening of credit standards. Chaebol debt ratios have been brought back to more sustainable levels and the most troubled companies have been put under workout programs.

On the negative side, the disposal of bad assets and non-strategic businesses has been slow. So has the pace and scale of a refocus on winning core businesses. Workout programs are not fostering rapid turnarounds through proactive cost reduction or structural transformation.

Moreover, South Korea's day-to-day corporate culture remains largely undemocratic. Decisions are made by personnel with seniority, regardless of their job performance. Finally, better corporate governance remains elusive, although some corporate boards are slowly opening to outsiders.

In the sensitive areas of labor restructuring and asset divestiture, inertia is usually followed by upheaval. Changes occur suddenly and with urgency. The government puts a good deal of pressure on the chaebols and banks to restructure, but is very concerned about generating social unrest, which shrinks the margin of freedom.

This was obvious during the summer when bank unions threatened to go on strike. Everybody knew the banking sector had too many branches, but the subject of downsizing was socially taboo and the dispute was finally settled through compromise.

The only significant job cuts in South Korea occurred in the midst of the 1998 recession. Economic recovery has brought increased labor rigidity and tense labor-management relations. It is indeed extremely risky for a CEO in the post-recovery environment to cut nonproductive jobs and re-deploy a workforce to achieve higher productivity.

Similarly, divestitures are an emergency last resort. Most sizable deals involving foreign investors have been completed under extreme pressure after other alternatives have been exhausted. This was the case of Ssangyong Paper, Ssangyong Securities, Korea First Bank and Samsung Motors. Even in these instances, negotiations were long and agreements difficult to reach.

Likewise, Daewoo announced in July 1999 its determination to sell more than $10 billion worth of assets within 90 days. But the chaebol is still trying to close its first large deal some 15 months later.

More than a year and a half after the end of the Asian financial crisis, the most powerful incentive for chaebols to transform themselves is still the risk of a credit crunch in the troubled financial sector. Conversely, a recent round of reforms in the banking sector was precipitated by the prospect of the bankruptcy of Ssangyong Cement, Hyundai Engineering and Construction and Dong-Ah Construction.

This pattern is identical to one seen throughout the 1997-98 economic crisis. It conveys a sensational and dramatic character to the change process, generating anxiety — both domestically and abroad — while raising the risk of relapse.

What is missing in large South Korean corporations today is the sound habit of proactively "restructuring oneself" by continuously streamlining costs and shedding less-productive assets without waiting for government pressure or near bankruptcy to take action. In the post-recovery era, one rarely finds in Korea the kind of factory closings or proactive mergers that have become so increasingly frequent in Western Europe or the United States.

The South Korean government may have forced corporations to make economic restructuring a priority, but in doing so it has taken a difficult central role in a process that should happen naturally without its intervention. The highly publicized and controversial deal between Hyundai and LG semi-conductor has not set a successful precedent by triggering other similar rationalizations. Rather, it may have acted as a deterrent.

One of the biggest obstacles to reform, however, is culture. A South Korean executive who increases headcount, grows his company's asset base and generates volume is seen as a national role model. If he starts cutting costs, turning down credit requests and refocusing the business he will most likely be rejected by his employees and peers. That is a high price to pay in group-oriented Korean society.

Indeed, thinking and acting against the common wisdom involves huge personal risks and brings with it heavy punishment in case of failure. In addition, a Korean worker who loses his or her job and has to change careers faces a deep trauma, not only financially but also in terms of social and family relations.

In addition, most asset sales to foreigners still generate uneasy feelings about giving away the national wealth. This is a view difficult to change because its roots go deep into the foundations of Korean society.

Two implications become clear when reviewing South Korea's track record of economic development. First, corporate reforms will accelerate only if change occurs on a cultural level. This will require new corporate role models that help reshape public opinion, new definitions of "corporate nationality" and "value creation," a more flexible job market, and an increased tolerance and appreciation of risk-taking. This may sound like wishful thinking and would probably be in many other countries, but Koreans have already demonstrated in their recent history an amazing ability to bridge wide cultural gaps in record time.

Second, the country must part ways with its schizophrenic, two-speed model of development. South Korea needs to simultaneously rationalize its large corporate, financial and IT sectors so they run together at one speed: full speed ahead . If large banks and industrial corporations undertake the discipline of proactive restructuring, they can avoid the macro-economic stress of forced reforms. This will in turn help free up IT ventures to grow quantitatively and qualitatively.

In more advanced economies the boundaries between traditional brick-and-mortar companies and "dotcoms" are vanishing and the future seems to belong to hybrid corporate models. As General Electric's CEO Jack Welsh puts it, "There is no new economy and old economy, there is the economy." This is the economy South Korea will need to play in to win.