Economists wary of Korean summit rewards
By Alan Wheatley
SEOUL (Reuters): Living up to their name as practitioners of the dismal science, economists are pouring cold water on the idea that last week's landmark summit between North and South Korea will lead to an overnight economic bonanza.
Some fret that South Korea can ill afford the cost of rebuilding the North; others say euphoric talk of reunification of the old Cold War foes will slow reforms in the South and could spur its big conglomerates to embark on a new expansionary binge.
All agree that the economic rewards of the pledge by the communist North and capitalist South to ease tensions and work for closer ties will be a long time coming.
Their caution was reflected in the Seoul stock market.
The benchmark index dropped 1.54 percent on Friday after a 5.9 percent slide on Thursday as concern grew about the financial fallout of a credit crunch that is hurting many companies.
Buoyed by a wave of optimism before the summit, investors had been snapping up construction shares in particular, expecting the government to commission infrastructure projects for the North.
The construction sub-index soared more than 44 percent by the end of the week before the historic leaders' meeting.
"After the summit, everybody knows that we have serious financial problems to tackle," said Mun Kung-cheong, head of economic research at Samsung Economic Research Institute.
The government acted on Friday to ease the financial strains, announcing that a handful of firms would set up a 10 trillion won (US$8.96 billion) fund to buy corporate bonds. It followed up on Sunday by saying two government agencies would guarantee a total of nearly $450 million in corporate bonds.
Jun Il-kim, fellow at the Korea Development Institute (KDI), said investors were asking whether President Kim Dae-jung was prepared to spoil the warm summit after-glow by asking for more sacrifices and taxpayers' money.
About 100 trillion won has already spent to stabilize the financial system, still wallowing in loans that turned sour in Korea's 1997-1998 currency crisis.
"The market is concerned that the growing optimism about reunification could deter the restructuring process, both in the financial and the corporate sector, because ministers won't want to tarnish the mood by implementing unpopular measures," Kim said.
He said there were also worries that the chaebol, or conglomerates, scenting a new lucrative source of profits, would go back to their bad old habits of putting growth before profit.
Cheong said Hyundai Group's grandiose ambitions in North Korea were one reason for the underperformance in the past year of the group's listed companies.
Hyundai has committed almost $1 billion, to be paid by 2005, for exclusive rights to ferry tourists to a resort in North Korea's scenic Kumgang mountains and has plans to build a huge industrial complex that would employ 40,000 people within a year.
"Hyundai has given away money to the North and the market is penalizing that," Cheong said.
Among other businesses anticipating money to be made, the Samsung group is reported to have expressed interest in jointly developing computer software and household electronic appliances with the North, using a well-educated but cheap labor force.
The group hopes to establish operations in three cities and eventually produce $1 billion worth of products annually, the Korea Herald reported.
Just how quickly companies will be able to expand into the North is a moot point given poor infrastructure and a daunting array of legal, financial and institutional hurdles.
"For the next couple of years I don't see a big surge in investment," said the KDI's Kim.
Younghoon Koo, chief economist at the Korea Center for International Finance, agreed.
"There are still a lot of barriers that deter investment in North Korea. A lot of things still have to be done," he said.
Sri-Ram Aiyer, head of the World Bank office in Seoul, doubted that the investment prospects in North Korea were great.
"What North Korea needs, probably more than money, is a good set of policies and a strategy to transition from a centrally planned economy to a market economy," Aiyer said.
"Remember, there are many missteps that have been made in Eastern Europe from which lessons can be learned," he said.
Another lesson from the collapse of East Germany and other East Bloc countries, he said, is that dumping communism always turns out to be far more expensive than first thought.
"Whether you look at Albania, or Latvia, or Poland, or the Ukraine, or Russia, the story's the same in every single case -- so the likely costs of North Korea will be higher than any initial estimates," he said.
Aiyer described one recent estimate of $1 trillion, by U.S. investment bank Goldman Sachs, as "shockingly high".
Fortunately, despite a post-crisis surge in its budget deficit, South Korea was in good financial shape, with a fairly modest level of domestic debt, thanks to past prudence, he said.
Other economists took a less sanguine view.
"We don't even have any resources to rebuild ourselves," said Choi Gongpil, chief economist at the Korea Institute of Finance, who is gloomy about the government's willingness to get to grips with what he sees as increasingly serious financial strains.
"One thing is clear," said Cheong at Samsung. "We're not like West Germany, which simply bought up East Germany. South Korea has just come through a crisis, and we're not rich enough to buy up the North."