The easy bit was to capitalise on disaffection with the Roh regime. Now President-elect Lee has to figure out how to deliver on his election slogan: the 747 economy. So now Lee has to set South Korea on a course where annual GDP growth is 7%, GDP per head is $40,000 per annum, and South Korea is the seventh largest global economy.
That second “7” is the tougher one to achieve, given that it’s dependent on the performance of other global economies as well as Korea’s, and given also the relentless upward trajectories of the BRIC economies. In order for Korea to move up the league table, other countries have got to move down; and for each faster-growth country that overtakes Korea there will need to be an Italy or a UK to falter.
So what about the inter-related first two digits, which are more within a country’s control? Growth requires investment, and while Lee’s ambitious canal project will pump money into the economy it’s not going to bridge the gap between the current 4% growth and the 7% target.
At least in the short term, the sources of investment cash are hard to identify. Inward capital investment in the form of private equity has taken a knock given the experiences of equity funds such as Lone Star, while statistics show that there has been a net outflow of foreign cash from Korea’s stock market over the past year.
Meanwhile, expansion of investment by way of bank lending, the main driver of Korea’s earlier growth, looks far from certain. A recent JPMorgan research note, featured in the FT, highlights that, as retail customers prefer domestic stock market returns to having cash in the bank, Korean banks’ loan-to-deposit ratios are increasing, albeit not quite to Northern Rock proportions. That gap between what the banks lend and what retail savers deposit with them has to be made up from wholesale sources, and in the current credit environment originating in the US wholesale funding is becoming more expensive.
“A fundamental solution of banks’ liquidity problem seems to require a recovery in real estate or of individuals’ liking for interest rate products — or else, some painful adjustments to unwind maturing loans.”
says the JPMorgan note. But real estate growth is stalling, while attracting individuals back to cash from the stock market requires higher interest rates — which tend to stifle growth. And unwinding maturing loans is a recipe for contraction rather than growth.
An alternative source of capital is the Chaebol constituency, and many commentators including Peter Bartholemew suspect Lee will adopt chaebol-friendly policies at the expense of smaller or medium-sized entities. As an example, the proposal to relax restrictions on chaebols’ ability to have shareholdings in financial institutions is cited. But commentators such as Tariq Hussain (in Diamond Dilemma) identify the chaebols as part of the problem behind Korea’s slowdown, not part of the solution.
And it’s not just south of the DMZ which needs investment. As we were reminded in yesterday’s Bloomberg report,
“South Korea is trying to narrow the gap between the economies of the divided nation to prepare for eventual reunification.”
Indeed, in yesterday’s print edition the FT includes among Lee’s election pledges:
- help North Korea reach growth of 17 per cent a year and $3,000 income per head
- establish five free trade zones in North Korea.
These pledges can be seen as an extension of Roh’s existing policy — though Lee’s more vocal concerns about human rights in the North may slow down the North’s willingness to open up — which would mean China sharing in the development of the North’s mineral resources rather than the South.
All these challenges imply that accelerating the South’s growth rate will be a bit more complex than in the gung-ho days of the 1970s and 80s, and certainly a lot harder than winning the election.
- Bank of Korea chief criticises lending competition, Reuters, 4 Jan 2008, in which Korean banks are chided for risk-aversion and sticking to what they know, rather than helping industry to invest.
Links and sources:
- Foreign investment seen declining, JoongAng Daily, 15 Dec 2007, on falling FDI
- Bond instability threatens Korean “subprime” turmoil, FT, 18 Dec 2007, on bank funding issues, interviewing JPMorgan chief Korea analyst
- Home prices in Korea stalling at a high point, International Herald Tribune, 18 Dec 2007
- Foreigners flee local stocks at record pace, JoongAng Daily, 19 Dec 2007
- North Korea Seeks Help to Turn Resources Into Growth, Bloomberg, 20 Dec 2007
- South Korea shifts right with new president Lee Myung Bak, Donald Kirk in the Christian Science Monitor, 20 Dec 2007, quoting Peter Bartholemew
- Candidates Clash Over Chaebol Ownership of Banks, Korea Times, 19 October 2007
- Seoul urged to ease bank investment rules, FT, 5 July 2007, on the Korean financial regulator calling for the chaebols’ “idle capital” to be allowed to flow into the financial industry