South Korea remains gloomy

South Korea remains gloomy

Robert J. Fouser, Kagoshima University, Japan;
The Korea Herald, Asia News Network, Seoul

What's with the Korean stock market? Over the past few weeks
the KOSPI has risen from the mid-500s where is has languished for
most of the year to the high-600s. If the trend continues, the
market could soon jump into the 700s, thus ending the year on a
upbeat note.

The robust stock market reflects a simple fact about the
Korean economy today: It is one of the few major economies that
is growing. The United States has been in recession since March
2001, and the Japanese economy is entering its second recession
since 1997. Growth in Europe is flat, but Germany, the region's
largest economy, is on the verge of recession. Many of the
important economies in Asia have reported sharply negative growth
for the third quarter of 2001. Of the major economies, only China
and Russia are experiencing solid growth.

As an export-sensitive economy, Korea reacts sensitively to
changes in the world economy. Two figures underscore the
importance of foreign trade: in 2000, the value of merchandise
exports was 38 percent of the GDP, and total foreign trade was 73
percent of GDP.

Traditionally, simultaneous recession in North America, Europe
and Japan cause the Korean economy to catch cold. The last
simultaneous recession occurred late 1970s and early 1990s,
caused the economy to enter a deep recession. The political
turmoil of 1979-1981 exacerbated an economic crisis that saw GDP
contract by 5 percent in 1980.

Things are different now. Over the past 20 years, the Korean
economy has moved from a cheap producer of export commodities to
a diversified economy that exports goods, technology and services
to all corners of the globe.

The biggest change in the economic picture is without a doubt
the growing presence of China in the Korean economy. Twenty years
ago, Korea had diplomatic relations with Taiwan and hardly any
trade with China; now China is Korea's third largest trading
partner. If current trends hold, China will soon replace Japan as
Korea's second largest export market after the United States. A
closer look at export markets shows that Greater China (China,
Taiwan, Hong Kong and Singapore) is now the largest export market
for Korea. Together, they absorb 21 percent of all exports.

The diversification of export markets over the last 20 years
has helped Korea escape the worst of a simultaneous recession in
North America, Europe and Japan. Beyond Greater China, Korea has
also developed export markets in parts of the developing world
where growth remains strong.

The key, however, is China. Despite the simultaneous
recession, the Chinese economy is expected to grow about 7
percent this year. This resilience follows similar resilience
during the Asian economic crisis of 1997-1998. At some point, the
Chinese economy will have to take a rest, but its strength during
times of broader economic weakness is one of the most overlooked
economic stories of recent times.

The strength of the economic boom and its consequences for
Korea are discussed in detail in China Shock, a recent surprise
bestseller published by the Maeil Business Newspaper. Published a
month before the Sept. 11 attacks, the book raised public
interest in the Chinese economy and the future relations between
Korea and China. China's entrance into the WTO and the recent
execution of a Korean citizen on drug charges have renewed
discussion of these questions.

Korean views of China are a complex mix of optimism and fear.
The economic benefits of dealing with China are obvious, as the
export figures confirm. To ignore such a large market in one's
neighborhood would be economic suicide. China needs capital,
technology and material goods to feed its economic boom, and
Korea is reliable and economic source for these necessities.
Korean companies have been quick to use China as a source of
cheap labor to produce goods at a lower cost than in Korea, thus
maintaining their competitiveness in world markets.

Though most of China's appeal has been economic, some have
argued that closer relations with China will encourage North
Korea to be receptive to overtures from South Korea. If anything,
closer relations with China will make it more difficult for China
to take North Korea's side in any dispute, thus depriving it of
big-power support.

Until recently, the optimists have held the upper hand in the
debate. The strength of the Chinese economy amid weakness in the
Korean economy this year has caused many to worry that China
might undercut Korean companies and drive them out of key
markets. The presence of many inexpensive Chinese imports in the
domestic market also feeds fears that a flood of Chinese imports
will drive Korean companies out of business even in their home
market.

The recent execution of a Korean citizen on drug charges,
however, has put the optimists on the defensive for the first
time since relations began to improve in the early 1990s. The
event and the Korean government's weak response have cast China
in role of big-power bully with Korea as a victim. It has created
a climate of fear in dealing with China that colors relations
between China and many other countries.

In the end, however, fear makes for weak economic and foreign
policy. Korea has much to gain from economic engagement with
China, as the accomplishments of the past 10 years have shown. At
the same time, it must remember that China is the most
undemocratic and arbitrary of the world's major powers.