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As President Moon Jae-in steps up efforts in Seoul to revive South Korea’s economy, all roads are leading to Tokyo. And not in a good way.
It’s grand to see Moon redoubling efforts to implement a “New Deal” for a long-neglected economy. Neglected, in the sense that Moon, in office since 2017, is the fourth South Korean leader in 17 years to telegraph a structural reform “Big Bang.”
Before Moon, Park Geun-hye, the president from 2013 to 2017, promised to “democratize” growth. By the time she left, little had changed at the top end of the economy – albeit, she kick-started a “creative economy” paradigm which has now come of age under a fortunate Moon, as witnessed by the currently vibrant startup and unicorn scene.
Ditto Park’s predecessor Lee Myung-bak (2008 to 2013), whose focus on green policies never really made it off the ground and whose flagship “four rivers” internal waterways project was widely assessed as, at best, a failure.
Whereas Lee’s big ideas may have come from his time as CEO of Hyundai Construction – one of South Korea’s family-owned conglomerates, or chaebol – his predecessor, Roh Moo-hyun (2003-2008), had been a human rights activist and lawyer promising a “participatory government” that spread the benefits of growth.
Roh was Moon’s mentor, so a reformist assault on the old school power structure of the chaebol was on the cards for Moon.
The cards fell otherwise.
At the outset, Moon assigned as his policy chief of staff Jang Ha-sung, a razor-sharp academic known for his spirited advocacy of shareholder rights. However, the magnitude and perils implicit in the task – to paraphrase a common belief, ‘Why risk killing the geese that are laying so many golden economic eggs?” – soon won out.
Jang did not manage to sink his teeth into the role before he was redeployed in a rather odd sideways move – as Seoul’s ambassador to China. That leaves the highest-profile chaebol sniping of the Moon years being an endless judicial attack on Samsung head Lee Jay-yong.
Yet, for all their differences, all four presidents had something in common: fobbing off their responsibilities, Japan-style, onto the Bank of Korea.
In each case, leaders saw the magnitude of the task of wrestling power away from the monopolistic chaebol and cajoling a change-averse parliament to upend the status quo. So they took the easy route and prodded the BOK to add ever more liquidity.
Such appears to be the case with Moon’s new and improved 160 trillion won (US$145 billion) scheme to reshape Asia’s fourth-biggest economy around technology. As Moon put it recently, his “New Deal plan marks the start of a great turn for the Republic of Korea,” calling it a “manifestation of the will to fundamentally transform” one of the globe’s most wired nations.
And here, three caveats are worth highlighting.
One, the last time a major restructuring took place in South Korea was during the 1997-8 Asian economic crisis. So bravo to Moon for not letting a new crisis – Covid-19 – go to waste.
Two, for raising Seoul’s ambitions. Though this economic shock in awe would have been nice in 2017, 2018 or 2019, it’s good to see his government, at last, getting under Korea Inc’s hood. Moon’s focus on digitalizing the economy and pivoting to a low-carbon growth model is highly welcome as China makes big strides raising its own tech game.
Three, Moon still has 17 months left in his single term in office to get this transformation going.
Will he? Though only time will tell, machinations in and around the BOK headquarters aren’t promising as these things go.
‘Leave it to the BOK’
Earlier this month, more than a dozen lawmakers began pushing a bill to broaden its mandate for the first time in a decade. Looked at one way, adding employment stability to the BOK’s responsibility-list seems a natural progression. The US Federal Reserve and Reserve Bank of Australia have similar goals layered onto conventional ones to control inflation.
And the fallout from Covid-19 makes this an all-hands-on-deck stimulus moment.
Looked at through the South Korean lens, though, this seems a way to take the onus off elected officials to build economic muscle.
If Moon is serious about creating 1.9 million new jobs over five years, he should get on with it. Increased fiscal support, tax incentives, regulatory loosening and more and broader efforts to level the playing field would reap long-term dividends.
All more aggressive easing by the BOK can do is reduce pressure on corporate margins in the short run.
And yet, lawmakers in Seoul – and let us remember, since April’s general election, Moon’s Democratic Party of Korea has held an absolute majority, so it faces no barriers to policymaking – seem more unified on BOK reform than providing Moon’s initiatives a much-needed tailwind.
In purely economic terms, it’s hard to quibble with Moon’s plan to create about 570,000 jobs in telecommunications, artificial intelligence and the gamut of other data-intensive industries by 2025. Moon also envisions minting another roughly 150,000 jobs in sectors like hospitals and schools, nearly 200,000 in infrastructure and about 340,000 in social safety-net roles.
Moon’s New Deal – as the name suggests – cribs from the policies of US President Franklin Delano Roosevelt following the Great Depression. But there are a few reasons why Moon’s try at epochal transformation raises doubts.
For one thing, Moon’s efforts to be a “jobs president” have been glacial, with earlier moves to raise the minimum wage getting scaled back. For another, much of his talk is aimed at the public, not the private sector. For another, Covid-19 has hammered jobs. For yet another, the big talk and little action of his predecessors.
Moon’s $145 billion growth jolt, meantime, is a galaxy away from the firepower FDR deployed in the 1930s. It’s not even 10% of South Korea’s $1.6 trillion economy. That makes it a world away from the 40% of gross domestic product Tokyo is furiously hurling at its own economy.
The biggest problem is how Moon’s New Deal gambit coincides with all too many same-old-same-old policies, like the BOK playing an outsized role.
It’s a “tricky undertaking,” says economist Frederic Neumann at HSBC Holdings. The problem, he says, is that “various mandates can at times stand in conflict to each other.”
Bubbly property, frothy growth
One risk area is the notorious housing-price bubbles that plague South Korea’s biggest cities and which are, as of time or writing, arguably Moon’s biggest domestic policy failure and one which more than anything else is driving a divisive haves-vs-have-nots narrative.
We will not even talk about his grandiose over-the-border plans to kick-start a “Peace Economy” with North Korea – plans that crashed into the dual barriers of international sanctions and plain, old-fashioned reality.
As of August, Seoul home values have risen more than 50% since 2017. That’s despite more than 20 asset-price cooling policies introduced on Moon’s watch. If the BOK cuts rates below zero – or tries quantitative easing – it might further widen the gap between average wages and living costs.
Last month, BOK Governor Lee Ju-yeol expressed an openness to engage with parliament over altering the central bank’s growth-stimulus objective. Yet Lee added that broadening his team’s mandate might collide with efforts to contain price and financial system stability.
On December 17, for example, he said: “We are wary of a build-up of financial imbalances, given the excessive rise in home prices compared to income growth and economic conditions.”
Another risk area – in the sense of “If it ain’t broke, don’t fix it” – is that South Korea, for all its challenges, is performing better than the vast majority of its Group of 20 peers, growing close to 2%. Economist Shaun Roache of S&P Global Ratings, notes that “Korea is one of the best performing economies in the world.”
Granted, the euphoric figures of the third quarter might be ground down in Q4 2020 and in Q1 2021 by both the highly unwelcome spike in Covid-19 cases that is challenging South Korea’s vaunted pandemic containment system, and the Johnny-come-lately vaccination program.
Still, it looks like South Korea is going to exit 2020 a lot better than its G20 peers. That might give Moon and the National Assembly the mistaken impression that all South Korea needs to thrive again is a few monetary jolts, just like his three predecessors.
What it needs is the New Deal that Moon is proposing – and then some.
The lure of risk aversion
This self-defeating cycle will sound familiar to long-time Japan watchers. A central Tokyo mistake is shelving politically-sensitive reforms to loosen labor markets, cut red tape and create more economic space for small-to-medium enterprises.
That explains why former Prime Minister Shinzo Abe’s nearly eight years in power did little to remake an aging and rigid economy.
South Korea needs to break this Japan-like pattern. Yet, says analyst Vincent Tsui of Gavekal Research, South Korea could be among the biggest winners if Covid-19 vaccines restore global growth.
“Today,” Tsui notes, “the growth outlook is improving as developed economies’ vaccination programs buoy confidence, spurring investment spending and technology infrastructure upgrades.”
Global advisory firm Gartner expects information-technology spending to jump 4% in 2021 following a 5.4% drop this year. It sees greater investment in data centers for cloud computing and a big catching-up dynamic boosting digital transformation efforts.
That means increased demand for South Korea’s memory chips and offers promising signals for Samsung’s highly promising (if nascent) foray into the more lucrative non-memory space. Tsui notes 2021 will mark a rebound for DRAM prices which are down 8% this year and 17% from August alone.
“Such adverse price effects show up directly in the macro data, as South Korea’s total electronics exports, in value terms, have been stagnant for five years, in contrast to Taiwan’s, which nearly doubled,” Tsui says. “This makes Korean equities – which mirror the country’s trade performance – a good candidate as investors rotate toward ‘Covid losers’ in the global economy’s recovery phase.”
Moreover, as it is tech exports that have, more than ever, been leading South Korea’s trade numbers this year, the good news for tech is doubly good news for Korea Inc.
At present, Moon’s approval numbers are down due to a range of domestic problems: the ongoing Covid-19 spike; the real estate policy fiasco; and a bruising political battle his justice minister is fighting with the chief prosecutor who is – at time of writing and despite all odds against – more than holding his own.
Yet his numbers are not disastrously low, and certainly he is not the lame-duck many South Korean presidents have been at this stage of his term. Moreover, he still has more than a year in office to see through his FDR legacy – and he has the House on-side.
The bad news is that Moon has, despite his risk-tolerant pre-presidential background – special forces soldier and human rights lawyer – not been a bold leader. On the contrary, prudence and caution have been two hallmarks of his presidency.
This suggests that both he and the tame political establishment will, instead of using the powers at their disposal to bust some radical moves in the economic space, will revert to the old-school standby and have the central bank do the job.
A quick Google search of Japan’s travails in this area could give Moon’s team pause for thought before going down that route.