SOUTH KOREA: Asia Economies - South Korea - The world's 11th largest economy is brought to a juddering stop.

SOUTH KOREA: Asia Economies - South Korea - The world's 11th largest economy is brought to a juddering stop. - For South Korea, the financial and economic crisis was singularly ill-timed. Having just made it to the first rank of industrialised countries

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Last Updated: 31 Aug 2010

For South Korea, the financial and economic crisis was singularly ill-timed. Having just made it to the first rank of industrialised countries with membership of the Organisation for Economic Co-operation and Development, the 11th largest economy in the world was dealt a near knock-out blow, which required the largest-ever country rescue put together by the IMF.

The question is not whether South Korea will have a recession but, rather, how long will it be before the economy can come out on the other side?

To an economy which as recently as 1996 was growing by more than 7% a year and managed nearly 6% last year in spite of the onset of the crisis towards year-end, a recession represents a bone-crunching stop. And what will emerge as a result of it will be a very different sort of South Korean economy.

The country faces two related, and difficult, challenges. The first is to keep the international banking community happy with the restructuring and reform process. The second is to manage that reform process in a way that maintains social and political cohesion. On the face of it, Koreans are adapting well to the new austerity; witness the reports of citizens queuing up to hand over their jewellery so that it can be used to bolster the nation's hard currency reserves.

There are, however, deeper problems. Even before the financial crisis, the country was experiencing rumbling labour unrest. Now, with at least a period of economic failure ahead - around a sixth of quoted companies on the Seoul Stock Exchange face bankruptcy this year - rising unemployment looms. Implementing an often painful restructuring programme, involving large-scale lay-offs, while containing union protests, is President Kim Dae Jung's greatest challenge.

Korean business does, on the face of it, have the huge advantage of a highly competitive exchange rate. For a maturing industrial economy, a 50% devaluation represents a huge potential boon. The recovery, when it comes, will be led by exports. So powerful a weapon is it, however, that Korean companies will have to be careful about the way they use it. The protectionist risk is a real one.

Similar considerations apply to the return of international investors to the Korean economy. Although supportive noises have been made, investors are cautious, following the 70% fall in the dollar value of Korean stocks in 1997, about any recovery in share prices. Rebuilding international confidence in the South Korean economy will be a long process.

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