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Wednesday, 18 December, 2002, 08:26 GMT
Watershed vote for Korea's economy
South Korean soccer fans
South Korea's economy is evolving rapidly

South Korea is facing its tightest ever presidential election race, and potentially one of the most important for its future place in the world.

The biggest disagreements between the two rival presidential candidates hinge on how friendly to be towards Communist North Korea and, by implication, attitudes to the United States, which includes the North in its "axis of evil".

Differences on economic policy have been less intense.

But economists believe that how bold the new government is about expanding economic reforms could decide if Asia's third biggest economy steps into the ranks of the world's top ten richest nations within the decade or not.

The next step

Get it right and Korea's sophisticated hi-tech economy could rival that of France or Germany in 10 years, says James Rooney, vice-chairman of Deloitte Consulting in Seoul.

Mess it up and Korea's window of opportunity could slam shut as its fast-growing neighbour China corners a bigger slice of trade and investment.

A man looks at a Korean stock market board
Korea's economy is doing well

"What this next administration does with the next five years is going to determine how successful Korea is with its future," says Mr Rooney.

The country's growth prospects remain strong as Korea is in the midst of a shift away from an austere emphasis on capital investment and saving towards spending on services.

South Korea has transformed itself in just 40 years from a poor agricultural economy to the world's 13th biggest, and a member of the rich nations' club, the OECD.

In that time, it has averaged growth of 8% a year, establishing global brands in key industries, such as Hyundai in cars, Samsung in mobile phones and LG in electronics.

Back from the brink

It suffered humiliation during the Asian financial crisis, finding itself forced to turn to the International Monetary Fund (IMF) for a loan.

Unemployment rose and glitzy stores were replaced by discount retailers, known as "IMF shops".

Protestors carry an effigy of the US president
Anti-US protests worry foreign investors
But Korea took the reform medicine and has emerged stronger. The government's growth forecast is 6% this year, more than double that of most OECD countries.

It has impressed foreign investors by paying back its $58bn debt to the IMF on time and carrying out reforms more thoroughly than other "Asian tiger" economies.

One of the most important reforms was a shake out of the banking system in which the state poured about $150bn in public money into the banks to wipe out their bad debts.

Greater transparency

Bank reforms weakened some of the cosy links between the financial sector and Korea's huge conglomerates, or chaebols, forcing them to tackle loss-making businesses and to operate in a more transparent, less cronyist way.

Banks switched their lending to consumers instead, helping them to spend their way out of recession with a credit card boom.

Foreign investors want these processes to go much further.

The trouble is that both presidential candidates are tied to conservative vested interests who might dampen the pace of change.

Pressure for slower change

Liberal human rights lawyer Roh Moo-hyun has links to the powerful trade unions.

He has promised better living standards and tougher controls on the chaebols.

Striking workers
Big strikes are frequent

His more conservative rival, Lee Hoi-chang, an ex-Supreme Court judge, is closer to the chaebols. He wants to cut corporate taxes and abolish restrictive labour laws.

Mr Lee's supporters are "the old firm and reform will definitely ease" if he wins, says Aidan Foster-Carter, a Korea specialist at Leeds University.

However, Mr Roh's anti-American, anti-big business populism could fuel opposition to foreign investment and wider market opening, says Dr Foster-Carter.

Union power delayed the sell off of loss-making firms like Daewoo Motor, for instance.

Ultimately, both parties are split between reformers and conservatives, in the view of Choi Byung-il, general secretary of the Citizens United for a Better Society pressure group.

'Now or never'

Much depends on how adventurous the winner is prepared to be in juggling these conflicting pressures, economists say.

They also believe Korea faces a once-only chance to enter the big league, poised between a major opportunity and a huge threat.

It is "only a matter of time" before Korea faces a direct economic challenge from China, where wages are lower, says Dr Foster-Carter.

Mr Rooney likens Korea to a ballerina balancing on a elephant.

Credit card
Bank and credit card loans have risen 34% in a year

If the balancing act fails, South Korea's chances of economic stardom will be crushed by it gargantuan neighbour.

But if South Korea can take its economy to the next level of sophistication it, like Hong Kong, can become a regional financial centre feeding the elephant and itself at the same time, he believes.

The opportunity consists in "filling in the blanks" in Korea's service sector to offer better lifestyles for the country's 48 million consumers, says Mr Rooney.

From the leisure industry or financial products such as credit cards and mortgages, what is on offer remains less developed than in Europe or the US.

"If Korea pursues the ambitious opportunities that face it - to globalise Korea, to bring it out into the world, to seek to become a regional business centre, to internationalise its financial markets - it could become number seven or number eight" among world economies, says Mr Rooney.

If not, "the window of opportunity will go away because of the sheer size of the China factor".

See also:

23 May 02 | Business
29 Apr 02 | Business
28 Nov 01 | Business
31 Aug 01 | Business
08 Mar 02 | Country profiles
05 Nov 02 | Business
25 Jun 02 | Business
17 Dec 02 | Asia-Pacific
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