Peter Sylvestre's picture

LINGERING malaise in South Korea is beginning to remind observers of Japan in the early 1990s as that country embarked on two decades of stagnation . . .

SEOUL — Symptomatic of the country she leads, President Park Geun-hye returned to Korea on April 27 from her tour of four South American countries feeling unwell. Although her doctors prescribed rest, she is confronting a host of challenges — because Korea, once one of the Asian Tigers, appears to have entered a period of prolonged political paralysis and economic stagnation.
As the Park Administration enters the midpoint of its five-year, non-renewable term, it appears to be facing a mid-life crisis.
Still reeling from its handling of the Sewol ferry sinking, (the first anniversary was only recently mourned), it is being rocked by political scandal.
Prime Minister Lee Wan-koo resigned on April 20 after only 70 days in office, a record for even this politically fractious country, after being accused of accepting approximately US$28,000 in bribes from Sun Wan-jong, a chaebol CEO who implicated various members of Park’s inner circle (a scandal that has grown to allegedly include all three of Park’s past and present chiefs-of staff) before committing suicide.
The resignation was not officially accepted until Park returned a week later. Sun was the second Prime Minister to resign during Park’s Administration.
True to form, the main Opposition leader, Moon Jae-in, of the New Politics Alliance for Democracy, declared the scandal “directly related to the legitimacy of her Presidency” and called for an independent inquiry.
He added ominously: “If she ignores our demands, we will start a war against corruption. We will do so fearlessly, and I hope the Park Administration and the Saenuri Party won’t be the main enemy in that war.”
On the diplomatic front, South Korea confronted two thorny issues simultaneously, on both of which it had to decide between the US and China.
US proposals to install the THAAD (Theater High Altitude Area Defence) system to counter North Korea’s ever-progressing nuclear programme has China increasingly alarmed. On the flip side, Korea’s decision in late March to join the Chinese-led AIIB (Asian Infrastructure Investment Bank) was a blow to US efforts to frustrate this challenge to the US dominated World Bank.
Attempts by Foreign Affairs Minister Yun Byung-se to spin this “caught between a rock and a hard place” position as a “blessing” were met with a chorus of incredulity.
Meanwhile, Korea has problems in terms of economic direction. One factor has been the steadily weakening yen. In October 2012, JPY 100 could buy KRW 1,430, but now it buys only KRW 900.
At the end of April, the Korean won reached its highest level against the Japanese yen in seven years, which directly impacts the 80 per cent of key Korean exports (as determined by the Ministry of Trade, Industry and Energy) that directly compete with Japanese producers.
As a result, Korean manufacturers of automobiles, semiconductors, petrochemicals and home appliances have been losing ground to their Japanese competitors.
Moreover, the Korea Institute for Industrial Economics and Trade calculates that every 10 per cent appreciation of the Korean won against the yen results in a six per cent decline in exports.
The Bank of Korea likewise has recorded a steadily rising Korea-Japan export similarity index (which measures the extent of export product overlap between the two) from 0.449 in 2007 to 0.501 in 2013.
With China’s economy also slowing, exports fell 4.3 per cent in March from a year earlier. Given that Korean exports have been the one bright spot in the Korean economy (36 continuous months of current account surpluses), it comes as no surprise that the economy registered growth of less than one per cent for the last four quarters.
Likewise unsurprisingly, Credit Suisse urged caution in early April when investing in South Korea, citing (1) negative value creation, (2) progressive downwardly-revised earnings (3) the weak yen, (4) desultory dividends, and (5) declining exports.
Korea has proven resilient during various crises that have rattled it in the past. What is called for now is the same national resolve the Miracle of the Han demonstrated during previous crises to shake off the lingering malaise that is beginning to remind observers of Japan in the early 1990s as that country embarked on two decades of stagnation.

* Peter Sylvestre is Seoul correspondent for ATI Magazine.