NEW DELHI -- Despite resentment against Japan for its colonial domination of the Korean Peninsula (1910-1945), South Korea followed Japan in its model of postwar economic development. In both countries, the central government established close links between commercial banks and companies while ensuring that an obedient central bank provided adequate liquidity. Behind all this were neomercantilist policies dressed up under the modern guise of export-led development.

Two seminal events have discredited the Japanese model and its variations. On the one hand, the bursting of Japan's bubble economy brought on a relentless era of slow economic growth. On the other hand, the turmoil that swept through East Asia in 1997-98 challenged the notion that governments could use bank-dominated financial systems to boost growth by relying upon exports.

Although Japan served as a detached mentor over the past decades, Asia's biggest economy is being edged off the radar screen of its neighbors. This reflects the fact that Japan's homegrown economic malaise attracts little favorable attention while China's high growth offers considerable allure. The new reality is that China is becoming South Korea's biggest Asian trading partner.

Indeed, South Korean President Roh Moo Hyun has stated that China is more important to his country's economic future. Evidence of this is South Korea's investment of $310 million in China over the first three months of 2003, a year-on-year increase of 121 percent. As it is, about 40 percent of South Korea's total overseas investment in the first quarter went to China.

China's trade policies are forcing other Asian countries to engage in a constant search to redefine their comparative advantage. At the same time, China has increasingly become a market for goods produced by its Asian neighbors.

And so it is that Seoul has begun to find its own way outside Tokyo's shadow. Other evidence of this is that conventional wisdom has it that Seoul differed significantly from Tokyo in the response to the distress experienced during the 1990s. While Japanese officials are depicted as being guilty of malign neglect, South Korean leaders are widely credited for having taken the initiative to oversee a departure from the past.

It is true that South Korea experienced corporate restructuring and that moves were made to sort out problems in the financial sector. To bolster the domestic banking system, Seoul withdrew more than 86 trillion won ($72 billion) of bad loans from the banking system with the support of a $58 billion loan from the International Monetary Fund. However, a number of structural problems persist that make it difficult for foreign investors to do business in South Korea.

Five years after being shaken by the unsustainable expansion and debt of many of the largest chaebol, some of the same underlying financial problems remain. As in the past, many South Korean borrowers expect creditors to roll over their debts endlessly.

An interesting test case is currently being played out. For its part, Goldman Sachs was the first foreign company to be successful in petitioning South Korean judges to force a delinquent domestic company into receivership. After amassing vast amounts of debt, the company had avoided solving its problems and had been granted a five-year moratorium on debt-repayment by creditors while its debt was restructured without its operations being subject to monitoring by the courts.

The American investment bank took action when Jinro Ltd. failed to make scheduled payments at the end of March on $200 million worth of debt. If the ruling is upheld on appeal, the South Korean company's management can be forced out and replaced.

Unfortunately, the ugly face of South Korean economic chauvinism has cropped up with denunciations from trade unionists and other parties. Their self-interests are disguised behind patriotism. The truth is that putting the company under receivership is likely to raise the company's value and provide surviving employees with greater job security.

Doubtless, foreign investors will be watching these events closely. Leaders in Seoul should also take note -- if they have any hope of South Korea's continuing to attract additional foreign capital.

For the most part, South Korea shunned foreign investments until the late 1990s when outside funds were increasingly viewed as a way to escape an economic slowdown. In 2000, about $16 billion in foreign direct investments came in, exceeding the total from 1962 to 1995. And foreign investors have collectively purchased about $6 billion in distressed South Korean assets since 1998.

All this has helped prop up South Korea's economic growth, expected to exceed 4 percent this year. Even so, there are many underlying problems, including accounting scandals, a volatile real estate bubble and problems in the credit card industry -- all the more reason for Seoul to abandon the failed economic policies pursued by Tokyo.