South Korea’s Resilience and Economic Strength Key to Possible Accord on the Peninsula
Art by Melinda Beck
The high-stakes drama and over-the-top rhetoric between North Korea’s dictator, Kim Jong-un, and US President Donald Trump captures headlines. And there’s little wonder why given the outsized personalities and inflammatory, often nuclear-backed insults involved. But it’s the southern half of the Korean peninsula that may be the linchpin for the region’s future because of its resilient economic strength.
Once-impoverished South Korea is now an exporting dynamo ranked as the world’s 11th largest economy, at $1.53 trillion. The nation’s steady growth, with gross domestic product rising around 3% annually, gives it the standing to help forge a solution to the face-off over the North’s nuclear weapons. And should a rapprochement be struck between the two Koreas, with the long-restricted border opened, then the South’s economy will benefit even more.
It was South Korea’s president, Moon Jae-in, who orchestrated the upcoming meeting between Trump and Kim. Considering that the US and the North’s leaders had only months before exchanged threats about nuclear destruction, this was quite an achievement.
Moon started by inviting the North’s athletes to march under a united Korean flag in the Pyeongchang Winter Olympics, which the South was sponsoring. This in turn led to the South acting as a go-between with Washington and arranging the Trump-Kim summit.
If nations have characters, resilience is the best term to sum up South Korea’s. Despite all the recent war talk between the US and the North, South Koreans have steadfastly refused to lose their cool, particularly in economic terms. “There wasn’t much of a financial reaction” in the South, even amid some of the most heated rhetoric from Trump and Kim, said Phil Torres, director of emerging market research at Aegon Asset Management.
And that’s in spite of South Korea’s capital, Seoul, sitting less than 40 miles from the border with the heavily armed North. In a war, the city is far more likely to be wiped off the map than is the District of Columbia (almost 7,000 miles away).
Indeed, throughout 2017 when Trump and Kim were issuing inflammatory comments, the Kospi Composite, which tracks South Korean stocks, advanced almost as much as the US’s S&P 500, up 21.8%. Both indexes are down this year, although that is more to do with another kind of war – the non-lethal kind, over trade – with the Kospi hurt less, losing 1.5% to the S&P’s 2.6%.
Aside from the latest conflict concerning the Kim regime, the South has weathered its own internal turmoils rather well. A major political scandal for one: President Moon’s predecessor, Park Geun-hye, last week was sentenced to 24 years in prison on corruption charges. Plus, China’s boycott of tourism to the South, over Seoul’s deployment of US-made anti-missile systems, has hurt a thriving industry. Polls show the South’s citizenry support the peace efforts, don’t think a war will happen, and remain optimistic about economic prospects – consumer confidence in March was up 8% from 12 months before.
Why has South Korea taken all this in stride? One rough English translation of the peninsula’s name is Land of the Morning Calm. And if you look at South Korea’s growth rate, the moniker seems apt. Prosperity buys a lot of calm. Over the past 20 years, production of cars has risen in value almost five-fold, computer chips have tripled, and liquid crystal displays – meaning flat screens – some 80 times.
Since its GDP’s descent into negative territory during the Asian financial crisis of 1997 – when South Korea and others needed an International Monetary Fund bailout due to too much debt – the nation has recorded unbroken growth on an annual basis, even during the 2008-09 global meltdown (although they were barely in the black during that harrowing time).
Lately, South Korea’s expansion of around 3% yearly isn’t on par with other emerging markets in Asia, such as the Philippines and Vietnam at 6% each last year, but these others have a fraction of South Korea’s economy. And the South’s GDP increase is a full percentage point better than that of the US.
Should the Trump-Kim talks lead to a grand bargain – perhaps with North Korea giving up its nukes, in return for a US non-aggression pledge and an opening to outside investment – then South Korea would be the prime beneficiary. The North is in dire need of infrastructure, and the South has a thriving construction industry. Huge contractors like GS and Daewoo build bridges, tunnels, and roads around the world. And they are on the doorstep to their needful neighbor.
A nighttime satellite picture of the Korean peninsula shows “the South lit up like a Christmas tree and the North with a few pinpricks of light, because they can’t produce electricity,” said Dave Haviland, managing partner at Beaumont Capital Management.
Under the most optimistic scenario, the South extends its economic prowess across the Demilitarized Zone (DMZ) separating the two Koreas. This storyline is inspired by the early 1990s reunification of East and West Germany, after the Cold War ended. While North Korea’s Kim, at 36, has no intention of relinquishing power and having Seoul run a combined nation, many in the West hope a more amenable leader will replace him. “North Korea would be a wonderful stew of revival if we could get rid of that knucklehead,” Haviland said.
Certainly, the tale of South Korea’s journey to wealth shows how good fortune could visit the almost-primitive nation on the other side of the DMZ. Following World War II, South Korea was one of the poorest countries on earth. Once the three-year Korean War ended in 1953, the South embarked on a quest to become a strong economy, with the help of US aid.
Their advantages:
Emphasis on exports. South Korea is extraordinarily export-driven, with exports making up 42% of its economic growth, according to the World Bank. That’s compared to 19.6% for China and 16% for Japan, two other export powerhouses. In the US, it’s 12%.
South Korea is a nation with few natural resources, yet it is blessed with an industrious people who have a high educational attainment. The South Koreans proceeded to replicate Japan, also war-torn and in the 1950s already embarked on a surging economic rebound. “They used the Japanese model – weak currency, low labor costs, and export strength – to develop their country and create wealth,” said John Yonemoto, chief investment officer at Albright Capital Management.
To some, Washington has been too kind to the South Koreans. As commentator Jim Cramer wrote on TheStreet.com: “They barely buy cars from us but flood our country with cheap cars and we accept it because we want a strong South Korean bulwark against North Korean aggression.” The recently struck Washington-Seoul trade pact exempts South Korea from the Trump administration’s tariffs on steel and aluminum.
Of course, if a trade war erupts between China and the US, South Korea could be hurt in the fallout. It makes many components for electronics that are manufactured in China. The top destinations for South Korea’s exports are China (26% of outgoing goods) and the US (14%).
Fostering new business initiatives. This is a nascent effort in South Korea. Yet one bright spot is its development of a high-quality medical system. “They’ve become a draw for medical tourism,” so foreigners visit the country for operations, said Gregory Bowes, managing principal at Albright Capital.
The obstacle to new business creation has been the dominance of the chaebol, giant family-controlled conglomerates that some say choke off small business start-ups. A lot of the medical industry growth is chaebol-driven, though some smaller enterprises are part of the picture. The South’s President Moon is trying in parliament to rein in some of the chaebols’ power, but his party lacks a legislative majority.
Low taxes. Also helping is that South Korea has a low tax burden. By the calculations of the Organization for Economic Cooperation and Development, its taxes on wages are only 22%, versus a 36% average of OECD nations and 31.7% for the US.
High savings rate. This aids capital formation, which fuels an economy. South Korea’s is 16.1%, compared to a mere 3.7% in the US.
To be sure, South Korea has weaknesses that it shares with other established nations. Its population is aging, which means that at some point the country will have fewer working people to support a large non-working retiree population.
According to the CIA’s World Factbook, the average age in South Korea is 41.8 years, which is better than Japan’s 47.3, but nowhere near that of other rising Asian nations, such as the Philippines (23.5) and Vietnam (30.8). China, thanks to its long one-child requirement, is not far behind South Korea, at 37.4. The US, which has more robust immigration than in Asia, is at 38.1.
The dominance of the chaebols, with their heavy influence on government policy, is problematical: They are mostly responsible for South Korea’s rise, but the price has been a culture of corruption that may hinder further growth.
Prime example: Former President Park’s conviction for taking millions in bribes from chaebol-controlled businesses. In the 1990s, two previous presidents were jailed for similar offenses. And Lee Jae-yong, head of Samsung, the nation’s largest conglomerate, received a five-year prison term in August for giving Park a $6.7 billion bribe. He was set free in February after an appeals court ruled in his favor on a technicality.
Still, South Korea remains an economic force to be reckoned with, fully capable of rebuilding the North, should diplomacy allow that to happen. As Beaumont’s Haviland noted: “That’s not bad for a country that went from making trinkets to cars and computers.”