COUNTRY REPORT
South Korea North Korea At a glance: 2001-02
OVERVIEW The leader of the opposition Grand National Party (GNP), Lee Hoi-chang, still looks well placed to win the end-2002 presidential election. The constitution may be amended to allow presidents to serve more than one term. The harder line taken by the new Bush administration towards North Korea may give the North an excuse to slow rapprochement with the South. Real GDP growth in South Korea will slow from 8.8% in 2000 to 3.7% in 2001, before accelerating slightly to 4.7% in 2002. Net trade will make a neutral contribution to GDP growth in 2001 and a negative contribution in 2002. Consumer price inflation will average 3.6% in 2001 and 1.7% in 2002. Lower world oil prices, the won‘s appreciation against the US dollar and the deflationary impact of economic reforms will all moderate inflationary pressures. Key changes from last month Political outlook • The tiny Democratic People‘s Party joined the ruling coalition in March, giving the government a slim majority in the National Assembly (parliament). Economic policy outlook • The Bank of Korea (the central bank) maintained its target interest rate, the overnight call rate, at 5% at its April monetary policy meeting, citing concerns over rising inflationary pressures. Economic forecast • The EIU has revised upwards its forecast for consumer price inflation in 2001 to reflect faster than expected inflation in the first quarter of the year. But we continue to believe that inflation will moderate over the forecast period.
May 2001
The Economist Intelligence Unit 15 Regent St, London SW1Y 4LR United Kingdom The Economist Intelligence Unit The Economist Intelligence Unit is a specialist publisher serving companies establishing and managing operations across national borders. For over 50 years it has been a source of information on business developments, economic and political trends, government regulations and corporate practice worldwide. The EIU delivers its information in four ways: through our digital portfolio, where our latest analysis is updated daily; through printed subscription products ranging from newsletters to annual reference works; through research reports; and by organising seminars and presentations. The firm is a member of The Economist Group.
London New York Hong Kong The Economist Intelligence Unit The Economist Intelligence Unit The Economist Intelligence Unit 15 Regent St The Economist Building 60/F, Central Plaza London 111 West 57th Street 18 Harbour Road SW1Y 4LR New York Wanchai United Kingdom NY 10019, US Hong Kong Tel: (44.20) 7830 1007 Tel: (1.212) 554 0600 Tel: (852) 2585 3888 Fax: (44.20) 7830 1023 Fax: (1.212) 586 0248 Fax: (852) 2802 7638 E-mail: [email protected] E-mail: [email protected] E-mail: [email protected]
Website: www.eiu.com
Electronic delivery This publication can be viewed by subscribing online at www.store.eiu.com Reports are also available in various other electronic formats, such as CD-ROM, Lotus Notes, online databases and as direct feeds to corporate intranets. For further information, please contact your nearest Economist Intelligence Unit office
Copyright © 2001 The Economist Intelligence Unit Limited. All rights reserved. Neither this publication nor any part of it may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior permission of The Economist Intelligence Unit Limited. All information in this report is verified to the best of the author’s and the publisher’s ability. However, the EIU does not accept responsibility for any loss arising from reliance on it.
ISSN 1350-6900
Symbols for tables “n/a” means not available; “–” means not applicable
Printed and distributed by Redhouse Press Ltd, Unit 151, Dartford Trade Park, Dartford, Kent DA1 1QB, UK 1
Contents
3 Summary 3 South Korea 4 North Korea
5 Inter-Korean relations
South Korea
7 Political structure 8 Economic structure 8 Annual indicators 9 Quarterly indicators 10 Outlook for 2001-02 10 Political outlook 11 Economic policy outlook 13 Economic forecast 17 The political scene 20 Economic policy 22 The domestic economy 22 Output and demand 25 Employment, wages and prices 26 Financial indicators 28 Sectoral trends 31 Foreign trade and payments
North Korea
34 Political structure 35 Economic structure 35 Annual indicators 36 Outlook for 2001-02 36 Political outlook 37 Economic policy outlook 38 The political scene 38 The domestic economy
EIU Country Report May 2001 © The Economist Intelligence Unit Limited 2001 2
List of tables
13 South Korea: forecast summary 14 South Korea: international assumptions summary 15 South Korea: gross domestic product by expenditure 16 South Korea: current-account balance 23 South Korea: expenditure on gross domestic product, 2000 23 South Korea: gross domestic product by industry, 2000 24 South Korea: seasonally adjusted manufacturing production 24 South Korea: construction indicators 25 South Korea: employment 26 South Korea: wages in manufacturing industry 26 South Korea: price indicators 27 South Korea: money supply trends 28 South Korea: financial market indicators 32 South Korea: exports and imports of selected commodities 33 South Korea: current- and capital-account balances 33 South Korea: external liabilities
List of figures
17 South Korea: gross domestic product 17 South Korea: won real exchange rates 27 South Korea: overnight call rate 29 South Korea: exchange rate 31 South Korea: trade indices in volume and value terms
EIU Country Report May 2001 © The Economist Intelligence Unit Limited 2001 3
Summary
May 2001
Inter-Korean relations The harder line of the new US administration gives North Korea what may be a welcome excuse to slow the pace of rapprochement with the South. Kim Jong-il’s visit to the South may be delayed. A third round of family reunions was held in February. Several South Korean firms have announced joint ventures with the North in its information-technology sector.
South Korea
Outlook for 2001-02 The leader of the opposition Grand National Party (GNP), Lee Hoi-chang, will win the end-2002 presidential election. The constitution may be amended to allow presidents to serve more than one term. Real GDP growth will slow from 8.8% in 2000 to just 3.7% in 2001, before accelerating to a relatively modest 4.7% in 2002. The contribution to GDP growth of net trade will be neutral in 2001 and negative in 2002. Changes in stockbuilding will make positive contributions to GDP growth in both years. The won will average W1,275:US$1 in 2001 and W1,213:US$1 in 2002. The won’s broad nominal appreciation during the period will be driven partly by continuing favourable merchandise trade flows and net capital inflows. Consumer price inflation will average 3.6% in 2001 and 1.7% in 2002. Lower world oil prices, the won’s steady appreciation against the US dollar and the deflationary impact of continued deregulation will all mute inflationary pressures.
The political scene The tiny Democratic People’s Party joined the ruling coalition in March. The coalition now has a slim majority in parliament. The cabinet was reshuffled in March. Relations with the US and Japan have deteriorated, and Russia’s president, Vladimir Putin, wrong-footed Kim Dae-jung during his first visit to Seoul.
Economic policy Concerns over the recent weakening of the won and rising inflationary pressures suggest that the Bank of Korea (BOK, the central bank) will not lower interest rates further for the time being. In early April the BOK and the Ministry of Finance and Economy differed publicly on the BOK’s plans to use reserves to support the won. The government’s leniency towards the ailing Hyundai group suggests that the impetus behind economic reform may be slowing.
The domestic economy Real GDP grew by just 4.6% year on year in the fourth quarter of 2000, taking real output growth for the year to 8.8%. Private consumption and investment growth were particularly slow during the quarter. Supply-side GDP data show manufacturing slowed sharply during the quarter. Domestic construction remains subdued in both volume and value terms. Unemployment rose to a recent high of 5% in February, but fell back slightly in March. Nominal wage growth in manufacturing slowed in the fourth quarter of 2000 year on year.
EIU Country Report May 2001 © The Economist Intelligence Unit Limited 2001 4
Consumer and producer price inflation both accelerated in the first quarter of 2001 year on year. Market interest rates remained stable, with the nominal yields on the three-year Treasury bond and the three-year corporate bond touching all-time lows. The stockmarket performed generally poorly, and the government announced that it would use state pension funds to try to boost share prices. Foreign direct investment commitments were sluggish in the first quarter, reflecting the generally more cautious attitude of investors to emerging market assets. Hyundai Engineering and Construction has been taken over by its creditors following a debt-for-equity swap at end-March. Woori Financial Holdings, South Korea’s first financial holding company, was launched in April.
Foreign trade and Preliminary data from the government show that South Korea recorded a payments cumulative merchandise trade surplus (customs-cleared basis) of US$2.4bn in January-March 2001, an improvement on the surplus of just US$437.8m recorded in the first three months of 2000. This mainly reflected a fall in the import bill. Export growth in the same period was sluggish. The current-account surplus fell by more than 50% in 2000, to just over US$11bn. Early repayment of IMF credits was partly responsible for a slight fall in foreign-exchange reserves at end-March to US$94.4bn from US$95.5bn at end-February.
North Korea
Outlook for 2001-02 Internally, North Korea’s political outlook remains stable. Its leader, Kim Jong-il, appears firmly in control of the government. China’s president, Jiang Zemin, may visit North Korea at end-2001. The EU may open formal relations with the North. Kim Jong-il’s visit to Shanghai in early 2001 shows that he grasps the need for the country to change. The problem remains, however, what to do and the manner of implementation. North Korea’s overall economic prospects depend above all on aid and reform.
The political scene The Supreme People’s Assembly, the rubber-stamp parliament, met in April, but only for a day. Party secretary Kim Yong-sun, a key figure in North-South dialogue, may have been promoted in the ruling hierarchy. In his keynote speech, the prime minister, Hong Song-nam, hinted at economic reform, but confirmed the primacy of the “army first” policy.
Economic policy and the The budget for 2000 was announced at the parliamentary session. The budget economy looks realistic compared with previous years, projecting modest rises in income and spending. Defence spending is planned at nearly 15% of the total in 2001, although since much defence spending is concealed, the real level may be higher. Operating rates at factories rose in February this year. Interest in the North Korean information-technology sector is growing.
Editors: Robert Ward (editor); Graham Richardson (consulting editor) Editorial closing date: May 2nd 2001 All queries: Tel: (44.20) 7830 1007 E-mail: [email protected] Next report: Full schedule on www.eiu.com/schedule
EIU Country Report May 2001 © The Economist Intelligence Unit Limited 2001 5
Inter-Korean relations
Kim Jong-il’s visit to Seoul The outlook for inter-Korean relations in 2001-02 has deteriorated since the looks less likely in 2001 last quarter. The harder line of the new US administration gives North Korea what may be a welcome excuse to slow the pace of rapprochement with the South. This means probable delays in three important areas. The first is the visit to the South of North Korea’s leader, Kim Jong-il, which is now unlikely in the next few months, or perhaps even in 2001 at all. That could be a blow to South Korea’s “sunshine policy”, although hosting the visit in 2002 might boost the chances of the ruling party, the Millennium Democratic Party, in the end-year presidential election, provided that all goes well.
The DMZ rail link may not The other two likely areas of delay are projects linked to North-South be reconnected on schedule rapprochement that may now stall. The first is the planned reconnection of rail and road links across the demilitarised zone (DMZ, the strip of land separating North and South Korea), for which the target date of September 2001 hardly looks feasible. While South Korea has started digging, the North has done little. Despite agreeing a protocol in February this year on joint work in the DMZ, two months later the North had yet to return it signed by its defence minister, Kim Il-chol. (The project is a military one on both sides.) This also dims hopes of a second meeting of defence ministers soon; the first took place in September 2000. South Korea is anxious to put security issues directly on the agenda, but the North is not keen. According to the Pentagon, North Korea has strengthened its military forces over the past year, despite the peace process. An attack by the North’s media on the South’s new defence minister, Kim Dong-shin, is also discouraging.
Hyundai’s Northern plans The second is the future of the plans by one of the South’s largest chaebol look vulnerable (conglomerates), Hyundai, to build an industrial estate in and operate tours to Kaesong near the DMZ and barely an hour from Seoul. Both projects will involve the partial transformation of the DMZ from a front line into a front door—something that the North’s army, the Korean People’s Army (KPA), may not yet be ready for. If the KPA needs an excuse besides the new US president, George W Bush, then Hyundai’s financial woes may provide it. Hyundai is already finding it difficult to pay the US$12m monthly fee for its politically vital (Kim Jong-il personally authorised the project) but loss-making tours to Mount Kumgang, a scenic spot in the North just inside the DMZ. With its construction flagship, Hyundai Engineering and Construction, in the hands of creditors, Hyundai cannot afford the estimated US$1bn needed for its Kaesong project. Since the death at end-March this year of the group’s Northern-born founder, Chung Ju-yung, his sons have been less keen to go North. Even if the South offers to bail out these ventures, the North may seize the chance to slow the pace. Nevertheless, it sent a senior official to Seoul, with a large wreath and a personal message from Kim Jong-il, to pay respects to the late Chung Ju-yung. The past few months have seen North Korea revert to unpredictability as a tactic. In March it cancelled the fifth round of ministerial talks, which are now
EIU Country Report May 2001 © The Economist Intelligence Unit Limited 2001 6
scheduled quarterly rather than monthly, on the day they were due to start. Dismay in South Korea was mollified when the culture and tourism minister, Kim Han-gil, returned from Pyongyang with a deal to field a joint table tennis team for the first time in a decade, until North Korea cancelled that too. Inter- Korean Red Cross talks, which were due in early April, also fell by the wayside.
More family reunions A third round of family reunions was held in late February this year. As before, are held a lucky few—100 people from each side, chosen by lot in the South, but only from elites in the North—flew between Seoul and Pyongyang for brief and public meetings with long-lost kin. The South wants to expand the scale and scope of the reunions to allow visits to homes and home towns. The North is reluctant, but in March did allow mail to cross the DMZ for the first time. A select 300 people from each side sent letters, but will not receive replies. Politically, so limited a process risks causing a Southern backlash now that the initial excitement has ebbed. Psychologically, these brief encounters are said to cause more upset than joy.
Economic co-operation Economic co-operation too is making mixed progress. Northern keenness in makes limited progress January this year to move forward, preferably by being given electricity at once, foundered on Southern insistence that this takes time and needs surveys. (See November 2000, pages 51-52, for a detailed discussion of the North’s electricity problems.) The North in turn did not yield to the South’s hope of flood control on the Imjin river by building a power station that could lower water levels downstream. The economic agreement signed in December 2000 has not provoked a rush North. The value of inter-Korean trade actually fell by 31% year on year in the first two months of 2001, to US$37m. A main reason was the North’s perverse boycott for two months of the main shipping line on the Inchon-Nampo route, almost reducing it and several small firms involved in processing-on-commission trade to bankruptcy.
IT projects fare well Enthusiasm is evident in one sector alone. Several small Southern firms have announced joint ventures in information technology (IT), computing, telecommunications and other areas in Pyongyang, and in one case, Sinuiju in the north-west. Also planned is an IT university in Pyongyang, a joint venture between the North’s education ministry and Christian groups in the South. Although North Korea has expertise in software, as ever one must wait to see how many of these projects actually come to fruition. In a cautionary note, the Southern telecommunications company, Hanaro Telecom, is still waiting to start production at its factory in Pyongyang, owing to chronic power shortages.
Euphoria gives way to If North Korea is holding back the peace process, that suits some in South Korea, criticism in the South who fear that rapprochement is too fast and unequal. The euphoria generated after the first ever inter-Korean summit in June 2000 has given way to criticism. The opposition Grand National Party, which may well regain power at the end- 2002 presidential election, accuses the government of appeasement. Human rights is a growing concern. A new pressure group of families of prisoners of war and others held in the North—85,000, they claim—will be a thorn in Kim Dae- jung’s flesh. The recent Nobel peace prize sits ill with his reluctance to press North Korea on such issues, even when they involve South Korean citizens.
EIU Country Report May 2001 © The Economist Intelligence Unit Limited 2001 South Korea 7
South Korea
Political structure
Official name Republic of Korea
Form of state Presidential system; president and National Assembly are directly elected; National Assembly members are elected under a mixed system of first-past-the-post and proportional representation
The executive The president (elected for a single term of five years) appoints the State Council (cabinet) comprising the president, prime minister and between 15 and 30 ministers. The State Council is not entirely composed of members of the National Assembly
Head of state Elected president
Legislature Unicameral Kuk Hoe (National Assembly) of no fewer than 200 members (currently 273) elected for four-year terms. Currently 227 seats are filled by direct election; the remaining 46 are distributed between parties in proportion to their share of the vote
National elections December 1997 (presidential) and April 2000 (National Assembly); next elections due by December 2002 (presidential) and April 2004 (National Assembly)
National government Coalition between the Millennium Democratic Party (MDP) led by the president, Kim Dae-jung, and two much smaller parties: the United Liberal Democrats (ULD) and the Democratic People’s Party (DPP). With 115, 20, and two seats respectively in the National Assembly, the coalition has a small parliamentary majority. The opposition Grand National Party (GNP) remains the largest party with 133 seats, but under the constitution is not empowered to form a government
Main political organisations Government: MDP, ULD, DPP. Opposition: GNP
Main members of State Council President Kim Dae-jung Prime minister Lee Han-dong Deputy prime minister (finance & economy) Jin Nyum Deputy prime minister (education) Han Wan-sang
Key ministers Commerce, industry & energy Chang Che-shik Construction & transportation Oh Jang-seop Defence Kim Dong-shin Environment Kim Myung-ja Foreign affairs & trade Han Seung-soo Government administration & home affairs Lee Keun-sik Health & welfare Kim Won-gil Information & communications Yang Seung-taik Justice Kim Jung-kil Labour Kim Ho-jin Planning & budget Jeon Yun-churl Science & technology Kim Young-hwan Unification Lim Dong-won Central bank governor Chon Chol-hwan
EIU Country Report May 2001 © The Economist Intelligence Unit Limited 2001 8 South Korea
Economic structure
Annual indicators
1996 1997 1998 1999 2000 GDP at market prices (W trn) 418.5 453.3 444.4 482.7 517.1 GDP (US$ bn) 520.2 476.5 317.1 406.1 457.2 Real GDP growth (%) 6.8 5.0 –6.7 10.9 8.8 Consumer price inflation (av; %) 4.9 4.4 7.5 0.8 2.3 Population (m) 45.6 46.0 46.4 46.9 47.3 Exports of goods foba (US$ bn) 130.0 138.6 132.1 145.2 175.8 Imports of goods foba (US$ bn) 144.9 141.8 90.5 116.8 159.2 Current-account balance (US$ bn) –23.0 –8.2 40.4 24.5 11.0 Foreign-exchange reserves excl gold (US$ bn) 34.0 20.4 52.0 74.0 96.1 Total external debt (US$ bn) 120.3 145.6 141.3 135.5b 138.4b Debt-service ratio, paid (%) 9.0 9.0 13.4b 24.9b 8.5b Exchange rate (av) W:US$ 804.5 951.3 1,401.4 1,188.8 1,131.0
April 25th 2001 W1,308:US$1
Origins of gross domestic product 2000 % of total Components of gross domestic product 2000 % of total Manufacturing 31.5 Private consumption 57.3 Financial & business services 19.1 Government consumption 10.2 Trade, restaurants & hotels 12.0 Gross fixed capital formation 28.7 Construction 8.2 Change in stocks 0.0 Government services 7.5 Exports of goods & services 45.0 Transport, storage & communications 6.5 Imports of goods & services –42.2 Agriculture, forestry & fishing 4.6 Statistical discrepancy 1.1 Electricity, gas & water 2.8 GDP at market prices 100.0 Mining & quarrying 0.3 GDP at market prices incl others 100.0
Main exports 2000c US$ m Main imports 2000c US$ m Electronic products 62,043 Electric & electronic machinery 43,293 Machinery & equipment 12,145 Crude petroleum 25,216 Metal goods 11,362 Machinery & equipment 18,426 Passenger cars 11,102 Chemicals & chemical compounds 11,838 Chemicals & chemical products 11,095 Iron & steel products 6,007 Total incl others 173,991 Total incl others 163,215
Main destinations of exports 2000 % of total Main origins of imports 2000 % of total US 21.8 Japan 19.8 Japan 11.9 US 18.2 China 10.7 China 8.0 Hong Kong 6.2 Saudi Arabia 6.0 Taiwan 4.7 Australia 3.7 a Balance-of-payments basis. b EIU estimate. c Customs basis.
EIU Country Report May 2001 © The Economist Intelligence Unit Limited 2001 South Korea 9
Quarterly indicators
1999 2000 2001 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr Consolidated central government finance (W bn) Revenue 25,828 23,044 16,587 26,533 31,025 27,292 25,311 n/a Expenditure and net lending 31,458 22,724 25,857 25,441 27,432 31,035 32,210 n/a Balance –5,630 320 –9,270 1,092 3,593 –3,743 –6,899 n/a Output GDP at constant 1995 prices (W bn) 107,613 110,085 123,086 109,170 118,087 120,259 128,753 n/a % change, year on year 11.2 13.0 13.0 12.6 9.7 9.2 4.6 n/a Industrial production index (seasonally adjusted; 1995=100) 127.4 134.4 144.5 148.7 151.3 160.6 155.4 n/a % change, year on year 24.9 29.7 27.5 23.9 18.7 19.5 7.5 n/a Employment, wages and prices Employment (‘000) 20,361 20,695 20,962 20,313 21,268 21,395 21,265 20,403 % change, year on year 0.9 3.6 5.2 6.3 4.5 3.4 1.4 0.4 Unemployment rate (% of the labour force) 6.6 5.6 4.8 4.7 3.6 3.6 3.7 4.8 Average monthly wages, industry (W ’000) 1,532 1,639 1,711 1,647 1,665 1,782 1,813 n/a % change, year on year 10.6 15.6 16.0 9.0 8.7 8.8 6.0 n/a Consumer prices (1995=100) 118.5 118.5 119.8 120.1 120.2 122.3 123.2 125.2 % change, year on year 0.6 0.7 1.3 1.5 1.4 3.2 2.9 4.2 Producer prices (1995=100) 117.2 117.3 119.6 119.5 119.4 120.4 121.4 122.5 % change, year on year –3.3 –1.9 0.4 2.2 1.9 2.6 1.6 2.5 Financial indicators Exchange rate W:US$ (av) 1,190 1,195 1,173 1,125 1,116 1,115 1,167 n/a W:US$ (end-period) 1,158 1,216 1,138 1,106 1,115 1,115 1,265 n/a Interest rates (av; %) Deposit 7.7 7.6 7.8 8.3 8.1 7.9 7.5 n/a Lending 9.4 8.9 8.6 8.7 8.6 8.4 8.5 n/a Money market 4.8 4.8 4.8 5.0 5.1 5.2 5.4 n/a M1 (end-period; W bn) 34,305 36,787 44,375 35,195 40,428 38,588 46,997 41,805 % change, year on year 22.9 12.7 24.7 7.5 17.8 4.9 5.9 18.8 M2 (end-period; W bn) 275,966 306,187 329,317 350,646 379,873 392,835 413,049 410,654 % change, year on year 26.4 24.2 27.4 26.0 37.7 28.3 25.4 17.1 Stockmarket index (KOSPI; end-period; Jan 4th 1980=100) 883.0 836.2 1,028.1 860.9 821.2 613.2 504.6 523.2 % change, year on year 196.4 169.5 82.8 39.1 –7.0 –26.7 –50.9 –39.2 Foreign trade (US$ m) Exports fob 35,742 35,087 42,602 39,268 43,410 44,375 45,214 n/a Imports cif –28,760 –29,759 –35,667 –38,830 –39,805 –40,405 –41,441 n/a Trade balance 6,982 5,328 6,935 438 3,605 3,970 3,773 n/a Foreign payments (US$ m) Merchandise trade balance 7,902 6,923 6,776 2,435 4,592 5,411 4,163 n/a Services balance –408 51 –176 –921 –809 –1,219 –1,024 n/a Income balance –1,784 –934 –1,289 –453 –1,229 –621 102 n/a Current-account balance 6,146 6,597 5,677 1,342 2,731 3,655 3,317 n/a Reserves excl gold (end-period) 61,920 65,415 73,987 83,581 90,112 92,467 96,131 n/a Sources: Bank of Korea, Monthly Statistical Bulletin; IMF, International Financial Statistics.
EIU Country Report May 2001 © The Economist Intelligence Unit Limited 2001 10 South Korea
Outlook for 2001-02
Political outlook
Domestic politics South Korea’s political environment will remain fluid in 2001-02. The main issue that will dominate the political scene over the forecast period will be the next presidential election, which is due in December 2002. If the election were held tomorrow, the victor would be Lee Hoi-chang, leader of the opposition Grand National Party (GNP), which governed South Korea under various names for almost two decades. Demographically the GNP is the natural party of power in South Korea, combining a populous regional base in the south- eastern Kyongsang provinces with conservative votes nationwide. Its defeat by a narrow margin of just 400,000 votes in the end-1997 presidential election was owing to a triple fluke: a split in the GNP; Kim Dae-jung’s alliance with the leader of the United Liberal Democrats (ULD), Kim Jong-pil; and the end-year financial crisis, which discredited the incumbents. This time the Millennium Democratic Party (MDP) is the incumbent and looks set for a backlash on several rather different counts: economic slowdown, the pain of restructuring, the lack of political reform, and the achievement of only sporadic progress in relations with North Korea. As ever Greater Seoul, in which around half the population lives, will decide the result.
The MDP’s only chance for victory in 2002 is to split the GNP and effect a party realignment—a time-honoured tactic given that South Korean parties resemble shifting congeries of factions loyal to a leader or region rather than stable institutions wedded to an ideology or programme. This might work; it has done so in the past. Lee Hoi-chang as a latecomer to politics (he was previously a judge) has no firm base in either of the GNP’s two main factions, the old conservatives and the young reformers, while the latter share much of the MDP’s broadly centre-left outlook. The MDP may also split as the fight to inherit Kim Dae-jung’s mantle intensifies. Rhee In-je, who lost the GNP the last election by running as an independent after losing the nomination to Lee Hoi- chang, is now an MDP front-runner and openly threatens to do the same again. The MDP is a more fragile coalition than the GNP. It will hold together for now, but may start to fray once campaigning begins in earnest.
It is not only the parties, but also the constitutions, that change often in South Korea; more than 50 years after its foundation in 1948, South Korea is already on its Sixth Republic. Discontent persists on two counts: an overweening presidency, and regional rivalries. Moves to curb the powers of the presidency by having parliament choose the prime minister and the cabinet—a policy favoured by the ULD, whose future is uncertain after its dismal performance in the April 2000 National Assembly (parliamentary) election—are now yielding to a new idea: to create a vice-presidency and allow two four-year presidential terms, instead of one five-year term as now. This has some merits. Holding presidential and parliamentary polls on the same four-year cycle, as in the US, would be less messy than at present. A vice-presidency is one way to build in regional balance, and a second term might counteract lame-duck tendencies. The president would, however, remain all-powerful. Nonetheless, this scheme
EIU Country Report May 2001 © The Economist Intelligence Unit Limited 2001 South Korea 11
enjoys growing back-bench support among all parties, and there may be moves to run the coming presidential election on this basis, albeit with no question of allowing Kim Dae-jung to run again.
International relations If in the past Kim Dae-jung has taken solace from troubles at home in success and esteem abroad—such as his recent Nobel peace prize—now even that consolation is denied him as new clouds loom on the international scene. The new US administration could bode ill for South Korea, not only in its own negative attitude towards North Korea, but also indirectly by souring relations with China and giving North Korea an excuse to back off from the peace process. South Korea’s new foreign minister, Han Seung-soo, who was chosen on the strength of the contacts he built up during his period as ambassador to the US, will have his work cut out to keep the alliance firm, and to try to persuade US president, George W Bush, to resume his predecessor’s engagement policy.
For South Korea and the US to be at odds would foment South Korean nationalism. Anti-US sentiment is relatively weak in South Korea, but sensitive issues include national missile defence (NMD)—which is opposed by most South Koreans and their government, although it tries not to say so—and the inevitable frictions created by the presence of US troops, including such questions as who pays for them and which country’s courts should judge crimes committed by US soldiers in South Korea. Financial burden-sharing has yet to be settled, and South Korean moves to try a US mortuarist who allegedly dumped formaldehyde in the Han river may lead to a fracas.
Nationalists also have their teeth in another ally. Kim Dae-jung’s creditable efforts to build a more mature friendship with Japan are now at risk in a row over a textbook (see The political scene). If not settled soon, this bodes ill for next year when the two countries must co-operate to co-host the football World Cup. Despite such problems, the US and Japan will remain South Korea’s core allies. South Korea may also move closer to China, which has been courting it for a decade. Relations with Russia will remain tense, partly owing to uncertainties surrounding Russia’s policy towards North Korea. Ties with western Europe will warm: Kim Dae-jung appreciates the EU’s backing for his “sunshine policy” now that the US is cold.
Economic policy outlook
Policy trends Although Kim Dae-jung will remain formally committed to continuing the economic reform programme over the remainder of his presidency, the pace of reform may slacken in 2001-02. This will reflect three factors. The first will be continuing political flux at home, which will reduce the government’s scope for implementing bold policy initiatives. The second is Kim Dae-jung’s declining popularity combined with “reform fatigue” among voters, which may, as a result, make him less willing to push through unpopular reforms, particularly ahead of the end-2002 presidential election. The third is the uncertain outlook for Kim Dae-jung’s “sunshine policy”, particularly given North Korea’s apparent unwillingness to reciprocate concessions made by the
EIU Country Report May 2001 © The Economist Intelligence Unit Limited 2001 12 South Korea
South. This may mean a trade-off in terms of abandoning or slowing further painful economic reform. The EIU does not, however, expect reforms that have already been implemented to be reversed over the forecast period.
Fiscal policy South Korea’s public finances are sound compared with those of many other OECD countries. In 1999 gross government debt stood at just 13.4% of GDP, making South Korea one of only three countries in the OECD (the others are Norway and Finland) whose public finances are in the black on a net basis (that is, assets exceed liabilities). However, the rapid ageing of the population, the potential costs of having to absorb North Korea at some stage in the future and the still uncertain cost of restructuring the financial sector put a premium on improving the fiscal position sooner rather than later. With this in mind, the government’s own medium-term fiscal forecast projects that a balanced budget will be achieved by 2003. The government’s projections for the initial 2001 budget are similarly optimistic, with an expected 25% year-on-year increase in tax revenue (to W85.8trn, or US$67.3bn at an exchange rate of W1,275:US$1) and nearly an 80% reduction in government bond issuance (to W2.4trn) helping to deliver a budget deficit for the year of just 0.1% of GDP.
Our fiscal forecasts are slightly more pessimistic, partly reflecting our assumption that, as economic growth slows, the cost of bailing out the still- fragile financial sector will rise by more than the government is expecting; in the initial budget, financial sector restructuring and debt servicing are scheduled to rise by just 4%, to W8.6trn. We also expect public spending to be maintained at relatively high levels in order to support domestic demand as economic growth slows, with the result that the 2001 budget projection of 4% growth in “social overhead capital” spending, to W14.6trn, may be overshot. This will become particularly important as the ruling coalition attempts to shore up its support base in preparation for the next presidential election at end-2002. The government may also find itself having to make larger contributions to Southern investments in North Korea, particularly if Hyundai, which has been in the vanguard of such activity, remains financially weak and is forced to scale back ambitious expansion plans.
We forecast that in 2001 and 2002 South Korea will be running budget deficits equivalent to 0.9% and 0.4% of GDP, respectively. Although these will be high levels by the standards of most of the 1980s and 1990s in which the budget was generally either in surplus or balanced, they will be low in comparison with other countries in the region worse hit by the 1997 financial crisis. Thailand will, for example, be running a budget deficit in excess of 3% of GDP in both years, while Indonesia’s will exceed 4% of GDP in 2002 from just over 3% in 2001. South Korea will, therefore, enjoy far greater leeway than either of these countries to implement fiscal stimulus measures should the slowdown in the US (and the consequent deceleration in South Korean growth) prove sharper than we are forecasting.
Monetary policy Monetary policy will remain controversial in 2001-02, with the Bank of Korea (BOK, the central bank) generally arguing for a more hawkish stance than the Ministry of Finance and Economy and the government. Given the still delicate state of the financial and corporate sectors—as demonstrated by the
EIU Country Report May 2001 © The Economist Intelligence Unit Limited 2001 South Korea 13
recent liquidity problems at Hyundai—the BOK will, however, have little choice but to maintain a broadly accommodating monetary policy in 2001- 02. In its April report, the BOK’s monetary policy committee cited concerns over accelerating consumer price inflation in the first quarter of 2001 as a reason for maintaining its current target rate, the overnight call rate, at around 5%. Further rate cuts are possible in 2001 if economic activity deteriorates further. The recent lowering of interest rates in the US and Japan and the expected moderating of inflationary pressures later in 2001 as world oil prices fall and the won firms will give the BOK extra room for manoeuvre should a rate cut be required.
Economic forecast
South Korea: forecast summary (% unless otherwise indicated) 1999a 2000a 2001b 2002b Real GDP growth 10.9 8.8 3.7 4.7 Gross fixed investment growth 3.7 11.0 2.8 5.3 Unemployment rate (av) 6.3 4.0 4.3 3.6 Consumer price inflation Average 0.8 2.3 3.6 1.7 Year-end 1.4 3.2 2.6 1.9 Short-term interbank rate 9.4 8.5 8.5 8.7 Government balance (% of GDP) –3.2 –1.2 –0.9 –0.4 Exports of goods fob (US$ bn) 145.2 175.8 175.8 193.4 Imports of goods fob (US$ bn) 116.8 159.2 165.1 185.4 Current-account balance (US$ bn) 24.5 11.0 5.5 2.7 % of GDP 6.0 2.4 1.3 0.6 External debt (year-end; US$ bn) 135.5 c 138.4 c 133.3 137.7 Exchange rates W:US$ (av) 1,188.8 1,131.0 1,275.0 1,212.5 W:¥100 (av) 1,043.7 1,049.5 1,026.0 985.8 W:€ (av) 1,266.5 1,044.8 1,230.4 1,312.5 W:SDR (av) 1,625.6 1,491.8 1,662.1 1,648.9
a Actual. b EIU forecasts. c EIU estimate.
International assumptions The outlook for South Korea’s external environment in 2001-02 is mixed. World trade growth will decelerate to around 5-6% during the period, a sharp slowdown from the estimated 13% notched up in 2000; this reflects slower economic growth in the US, Japan and the EU. The slowdown in the first two, which are South Korea’s two largest export markets by far, will be particularly damaging. US dollar prices for aggregate world manufactured exports will rise from 2002, albeit modestly. South Korea’s exporters will derive limited benefit from the rise, as the weakening yen will force them to keep the US dollar prices of their goods low in order to maintain competitiveness; the Japanese are South Korea’s main competitors in third markets. Following the sharp increase in 2000, world oil prices (dated Brent) will fall back again in 2001 and to a lesser extent in 2002, as oil production increases and slowing US growth
EIU Country Report May 2001 © The Economist Intelligence Unit Limited 2001 14 South Korea
dampens demand for the resource. Industrial raw material prices are expected to rise in 2001-02. The impact of this on South Korea should, however, be cushioned by the continued appreciation of the won against the US dollar in 2001 and 2002. Lower interest rates in the US and ultra-low rates in Japan will benefit South Korea’s heavily indebted companies by lightening their debt- servicing burdens.
South Korea: international assumptions summary (% unless otherwise indicated) 1999 2000 2001 2002 Real GDP growth World 3.6 4.9 2.9 3.8 OECD 3.1 4.0 1.7 2.5 EU 2.5 3.3 2.5 2.6 Exchange rates (av) ¥:US$ 113.9 107.8 124.3 123.0 US$:€ 1.07 0.92 0.97 1.08 SDR:US$ 0.731 0.758 0.767 0.735 Financial indicators ¥ 2-month private bill rate 0.27 0.24 0.18 0.10 US$ 3-month commercial paper rate 5.18 6.32 4.40 5.20 Commodity prices Oil (Brent; US$/b) 17.9 28.4 24.1 24.0 Total non-oil commodities (% change in US$ terms) –13.6 1.7 5.6 10.6 Food, feedstuffs & beverages (% change in US$ terms) –18.6 –6.1 8.0 14.8 Industrial raw materials (% change in US$ terms) –4.6 13.4 2.6 5.1
Regional aggregate GDP growth rates weighted using purchasing power parity exchange rates.
Economic growth Real GDP will grow by 3.7% in 2001 and by 4.7% in 2002. These are low rates of growth by the robust standards of 1999-2000 and mainly reflect the recent deterioration in the economic prospects of the US, South Korea’s largest single export market, which will help to slow growth of exports of goods and services from over 20% in 2000 to just 4-8% in 2001-02. The faltering of Japan’s brittle economic recovery in 2001 will act as a further drag on export volume growth. With growth in imports of goods and services set to outpace that of exports in 2001-02—exports and capital investment will remain import intensive—we expect the contribution to overall growth of the foreign balance to be neutral in 2001 and negative in 2002. This will compare with the 3.5-percentage point contribution by net trade in 2000. A slower run-down in stocks should, however, partially offset this, boosting growth in 2001 and 2002 by 0.6 and 1.5 percentage points, respectively.
Slower export growth will depress domestic demand growth in both years of the forecast period. Gross fixed investment growth will decelerate sharply from 11% in 2000 to just 3-5% in 2001-02, as the deteriorating earnings environ– ment for those companies dependent on export revenue and the still harsh credit environment dissuade firms from undertaking new investment in plant and equipment. Although public works spending will be maintained at high
EIU Country Report May 2001 © The Economist Intelligence Unit Limited 2001 South Korea 15
levels in order to cap unemployment, this will not be enough to offset the slowdown in investment demand from the private sector. We also see little prospect of a rebound in private-sector construction growth in the near term. Private consumption growth will slow to 3-5% in 2001-02, compared with rates of 7-11% in 1999-2000. In part, this will reflect the final unwinding of pent-up consumer demand accumulated in the recession year of 1998, as well as decelerating real wage growth as corporate profit growth slows. Continued financial problems at some large firms will also soften consumer sentiment over the short term.
South Korea: gross domestic product by expenditure (W bn at constant 1995 prices; % change year on year in brackets unless otherwise indicated) 1999a 2000a 2001b 2002b Private consumption 224,151.9 240,016.9 247,129.9 260,175.7 (11.0) (7.1) (3.0) (5.3) Public consumption 40,328.4 40,840.3 41,616.3 42,157.3 (1.3) (1.3) (1.9) (1.3) Gross fixed investment 118,772.9 131,883.3 135,576.0 142,761.6 (3.7) (11.0) (2.8) (5.3) Final domestic demand 383,253.2 412,740.5 424,322.2 445,094.6 (7.6) (7.7) (2.8) (4.9) Stockbuilding –6,167.6 –10,316.1 –7,500.0 –200.0 (5.4) c (–0.9) c (0.6) c (1.5) c Total domestic demand 377,085.6 402,424.4 416,822.2 444,894.6 (14.7) (6.7) (3.6) (6.7) Exports of goods & services 203,443.5 247,303.2 258,858.2 280,136.2 (15.8) (21.6) (4.7) (8.2) Imports of goods & services –141,443.0 –169,800.7 –180,403.5 –207,066.3 (28.8) (20.0) (6.2) (14.8) Foreign balance 62,000.5 77,502.5 78,454.7 73,069.9 (–1.0) c (3.5) c (0.2) c (–1.1) c Statistical discrepancy –1,376.6 –3,657.5 –1,600.0 –1,000.0 GDP 437,709.5 476,269.4 493,676.9 516,964.5 (10.9) (8.8) (3.7) (4.7)
a Actual. b EIU forecasts. c Contribution to real GDP growth.
Inflation Consumer price inflation rose by 4.2% year on year in the first quarter of 2001, the fastest rate since 1998. This mainly reflected rapid increases in prices for fuel and for medical care services. Our forecast assumes that the rate of increase in consumer prices decelerates in the latter part of 2001 and remains broadly steady in 2002. Underlying this forecast is the assumption that lower world oil prices, the firming of the won and the narrowing positive output gap reduce inflationary pressures over the period. The deflationary impact of corporate and financial sector restructuring (which will also keep unemployment relatively high by pre-crisis standards and serve to moderate wage growth) will also help to limit price rises. In the light of the more rapid than expected inflation outturn for the first quarter and our downward revision to the won:US dollar forecast, we have revised our inflation projections from the previous report and now expect consumer prices to rise by an average of 3.6% in 2001 and 1.7% in 2002.
EIU Country Report May 2001 © The Economist Intelligence Unit Limited 2001 16 South Korea
Exchange rates We have revised our won:US dollar forecast from our previous report and now expect the won to average W1,275:US$1 in 2001 and W1,213:US$1 in 2002. This downward revision partly reflects our expectation that the yen will continue to weaken against the US dollar until the last quarter of 2001 and that the government will, as a result, allow the won to weaken over the same period in order to maintain South Korean exporters’ competitiveness against increasingly aggressive pricing from Japanese rivals. Nevertheless, we expect the won to start gaining against the US dollar from the latter part of 2001, reflecting both improving growth prospects as the worst of the US economic downturn is over and a continued favourable merchandise trade position and net inflows of portfolio and foreign direct investment. A healthy reserves position will also underpin the currency’s stability; we expect foreign-exchange reserves to reach US$115bn by end-2002. In real effective terms, the won will remain stable in 2001-02 and considerably weaker than it was in the years immediately before the end-1997 financial crisis.
External sector South Korea will record large, albeit declining, current-account surpluses in 2001 and 2002, equivalent to 1.3% and 0.6% of GDP, respectively. Driving the expected deterioration will be the rapid erosion of the merchandise trade surplus (fob-fob, payments basis), from US$16.6bn in 2000 to US$8bn in 2002. This movement will mainly be the result of the sharp slowdown in export volume growth, largely owing to reduced demand for South Korean goods in the main US and Japanese markets (compared with 1999-2000 levels), which will cause export revenue growth to slow. This is probably already happening as customs-based data show that year-on-year export revenue growth (customs- based data) grew by just 3% in the first quarter of 2001, after notching up rates of 20-30% in three of the four quarters of 2000.
South Korea: current-account balance (US$ m unless otherwise indicated) 1999a 2000a 2001b 2002b Goods: exports fob 145,164 175,782 175,779 193,355 Goods: imports fob –116,793 –159,181 –165,131 –185,369 Trade balance 28,371 16,601 10,648 7,986 Services: credit 26,529 29,700 28,543 29,715 Services: debit –27,180 –33,674 / –31,535 –33,244 Services: balance –651 –3,974 –2,992 –3,529 Income: credit 3,244 6,842 4,289 5,105 Income: debit –8,403 –9,042 –7,065 –7,524 Income: balance –5,159 –2,200 –2,776 –2,418 Current transfers: credit 6,421 6,411 5,960 6,421 Current transfers: debit –4,506 –5,794 –5,387 –5,803 Current transfers: balance 1,915 617 574 618 Current-account balance 24,477 11,044 5,453 2,656 % of GDP 6.0 2.4 1.3 0.6
a Actual. b EIU estimates.
EIU Country Report May 2001 © The Economist Intelligence Unit Limited 2001 South Korea 17
The invisibles balance, meanwhile, will remain in deficit to the tune of around US$6bn-7bn in 2001-02. The services deficit will be US$3bn in 2001 and US$3.5bn in 2002. This compares with the US$4bn recorded in 2000, which was also the second highest level ever after the US$6.1bn recorded in 1996. The slight improvement will be partly owing to reduced import volume growth, which will moderate increases in import-related services debits. Services credits should also receive a fillip in 2002, as the football World Cup boosts inward tourism. The income deficit will widen to US$2.8bn in 2001 from US$2.2bn in 2000, before falling back slightly to US$2.4bn in 2002. The deterioration (particularly in 2001) will in part arise from subdued returns on investments in US and other foreign assets as world economic growth slows.
The political scene
Another new coalition is The main events of the past few months—the formation of a new ruling formed coalition and a large-scale cabinet reshuffle—were more cosmetic than an attempt to address fundamental systemic problems. On one level it is good news that for the first time the government has a majority in the National Assembly (parliament). The way this was done will, however, increase bad blood among the two main parties, the ruling Millennium Democratic Party (MDP) and the opposition Grand National Party (GNP).
The MDP reforged its old alliance with the United Liberal Democrats (ULD) in early 2001 by seconding a handful of its own parliamentarians to the latter (February 2001, page 16). In March it recruited the tiny Democratic People’s Party (DPP), which was formed in the run-up to the April 2000 parliamentary election by a group of former members of the GNP. One of the DPP’s two National Assembly members, Han Seung-soo, was rewarded by being made foreign affairs and trade minister—a worthy choice, as it happens. The MDP’s 115 parliamentary representatives plus the ULD’s 20 and the DPP’s two give the three parties a one-seat majority in the 273-seat National Assembly.
EIU Country Report May 2001 © The Economist Intelligence Unit Limited 2001 18 South Korea
The GNP is furious at being outmanoeuvred, so parliament is unlikely to operate any more smoothly now that the coalition has secured its majority. Both it and the MDP would rather scheme and play hardball than grapple seriously with the issues of the day. A partial exception is North Korea, where there is a clear and proper divide between the MDP’s outreach and the GNP’s harder line, although the MDP’s hawkish ULD allies make unconvincing supporters of the MDP’s “sunshine policy”. Elsewhere, however, especially on the economy, the GNP has no coherent critique of the government’s increasingly incoherent policies, and is content with point-scoring and name-calling.
The cabinet is reshuffled In opposition the current president, Kim Dae-jung, criticised his predecessor, Kim Young-sam, for frequent cabinet reshuffles, but in office he has done the same. On March 26th almost half of the cabinet lost their positions as nine ministers, three other officials of cabinet rank and two senior presid– ential secretaries were replaced. A similar cull of vice-ministers followed shortly afterwards.
This reshuffle had two aims: coalition-building; and restoring confidence. Renewed ties with the ULD and new ones with the DPP meant cabinet positions for both parties. The lacklustre ULD prime minister, Lee Han-dong, kept his job, and is now joined by three others from his party, one of whom, the new commerce and industry minister, Chang Che-shik, is an MDP representative “on loan” to the ULD. As mentioned, Han Seung-soo, one of the DPP’s two representatives, was made foreign affairs and trade minister.
Han Seung-soo is appointed The main aim of the reshuffle was, however, to restore confidence, chiefly at foreign minister home but also abroad. A conservative ex-ambassador to the US, where he retains good connections, it is hoped that Han Seung-soo can smooth relations with the new Bush administration. As a former economics professor, he is well qualified to handle trade disputes, now the province of the foreign ministry. Similarly the new defence minister, Kim Dong-shin, a former chief of staff, won US confidence as deputy commander of the Combined Forces Command. His predecessor, Cho Seong-tae, had been at odds with the US over weapons procurement and other matters.
Mainly, however, it was domestic confidence that needed to be restored. Lim Dong-won returns to the unification ministry from heading the National Intelligence Service (NIS, the renamed Korean Central Intelligence Agency, or KCIA), after criticism that the architect of the “sunshine policy” should not also be in charge of national intelligence operations. The health and welfare minister, Choi Sung-jung, and the construction and transportation minister, Kim Yoon-ki, both paid the price for mistakes in their respective fields and were replaced. Another victim was the maritime affairs and fisheries minister, Roh Moo-hyun, a contender for the MDP presidential nomination, who had been criticised for urging a war against the largely hostile local press. Jin Nyum was retained as finance and economy minister, having been promoted to deputy prime minister only two months ago (February 2001, page 17).
EIU Country Report May 2001 © The Economist Intelligence Unit Limited 2001 South Korea 19
The Cholla old-guard The new team promptly ran into flak. There was dismay at the return of former makes a comeback culture and tourism minister Park Jie-won as the president’s top policy adviser, only months after he had resigned over alleged influence-peddling (a charge that he denies). The new appointees include nine professional politicians and six from Cholla, Kim Dae-jung’s home region. The latter are also a fillip for the MDP’s old guard against its non-Cholla Young Turks, who revolted openly in December 2000 (February 2001, page 17) and are liable to do so again.
The new presidential labour and welfare adviser, Lee Tae-bok, may raise business eyebrows; he is a long-time political activist who spent many years in jail. Another radical, a poet and dentist to boot, is the new science and technology minister, Kim Young-hwan. The new information and commun- ications minister, Yang Seung-taik, is, however, a serious technical expert who is expected to speed up the introduction of third-generation telecom- munications services.
Health reform is bungled The main political issue of early 2001 was the badly bungled healthcare reform. This has split the roles of doctors and pharmacists, with the former prescribing drugs and the latter selling them; before, both doctors and pharmacists did both. The aim was to curb over-prescribing and save money for the national health insurance scheme (NHIS). In practice this has been a disaster. Both professions opposed it and each other, with doctors fearing that they would lose a large part of their incomes. Doctors’ strikes in 2000 led to the deaths of some patients; the doctors were bought off by three increases in their fees. Patients complain of inconvenience, as they can no longer get one-stop treatment. To cap it all, so far from saving money, costs have spiralled. The NHIS expects a W4trn (US$3.1bn at an exchange rate of W1,275:US$1) deficit in 2001 and may go bankrupt earlier unless bailed out.
Feelings ran so high that the health and welfare minister was sacked even before the main cabinet reshuffle. Yet his successor also had a hand in planning the new scheme, which had been pushed by a clique of party and presidential advisers, with sceptics criticised, and in some cases dismissed, as “anti-reform”. If this shows the policy process in a bad light, the denouement was worse, with the health and welfare ministry and the MDP desperately passing the buck and pointing the finger of blame elsewhere.
Inchon International This episode inflated parallel fears about Seoul’s new gateway to the world. Airport opens Inchon (Incheon, in the education ministry’s new romanisation system) International Airport (IIA) opened on March 29th, replacing overstretched Kimpo (now Gimpo). Despite worries, especially about the baggage handling system, in the event the transition went smoothly. IIA is, however, twice as far (60 km) from central Seoul as Kimpo International Airport, with the sole access by a toll road; a rail link is not due to open until 2005. There is no hotel on site yet. With 24-hour opening and low landing fees, IIA hopes to challenge Hong Kong International Airport and Kansai International Airport in Japan as north- east Asia’s regional hub.
Vladimir Putin wrong- This has not been a good quarter for foreign affairs, which Kim Dae-jung sees foots South Korea as his forte. Two summits in quick succession both went badly. In late February
EIU Country Report May 2001 © The Economist Intelligence Unit Limited 2001 20 South Korea
this year, Russia’s president, Vladimir Putin, made his first visit to Seoul, having pointedly preceded this by going to Pyongyang in July 2000 (August 2000, page 43). Mr Putin wrong-footed his Southern hosts twice by arriving a day early and then pushing a joint communiqué strongly supporting the 1972 anti-ballistic missile treaty (ABM)—read in the US as criticising US plans for national missile defence (NMD), which would contravene the ABM accord. Kim Dae-jung is unhappy about NMD, but had not intended to signal this just before visiting the US. His foreign affairs and trade minister, Lee Joung-binn, was sacked in March’s reshuffle, for this and a further gaffe when he revealed (and then tried to deny) differences with the US over NMD.
Kim Dae-jung meets This was not an auspicious backdrop to Kim Dae-jung’s visit to Washington a George W Bush week later, as the first Asian leader to meet the new Bush administration. Despite the formal warmth of his welcome, Mr Kim’s visit produced no meeting of minds on the issue of North Korea. The disagreement was not just between host and guest but also within the former, who displayed divided counsels as well as a harder line. Thus secretary of state, Colin Powell, expressed readiness to continue the Clinton administration’s missile dialogue with North Korea, but back-pedalled the following day after his president made it clear that he had no plans to talk to North Korea in the near future. Even Kim Dae-jung’s domestic critics felt that their president was not shown due respect and worry that so far the new US line is more posturing than policy. President Bush made partial amends by announcing a trip to Seoul in October this year, en route to the Asia-Pacific Economic Co-operation (APEC) forum meeting in Shanghai. Many in South Korea hope that by then he will have rethought his position, and resumed negotiations with North Korea.
Relations with Japan cool As if this were not trouble enough, another of Kim Dae-jung’s foreign policy successes is now at risk. He has worked hard to build a more mature relationship with Japan, extracting the Japanese government’s fullest apology yet for the colonial past and ending import bans that had included cultural items like Japanese music and film. Issues like the disputed Tokdo islet (known as Takeshima in Japan) and fishing boundaries have been defused. All this is threatened by the approval by Japan’s education ministry of a new nationalist school textbook, which despite some amendments is seen by Koreans (and Chinese) as whitewashing Japan’s record in the pre-1945 era. On April 10th South Korea withdrew its ambassador from Tokyo in response to criticism at home for being soft on Japan. If this row does not die down soon, it may damage what would in any case prove to be a challenge, the two countries’ co- hosting of the 2002 football World Cup.
Economic policy
Further interest rate cuts The won touched at a 30-month low of around W1,365:US$1 in early April, are unlikely having fallen by about 8% since the beginning of the year, after a 5% nominal annual average appreciation in 2000. It is important for South Korean exports to maintain a competitive position, in particular against a weak yen, but falls
EIU Country Report May 2001 © The Economist Intelligence Unit Limited 2001 South Korea 21
of this magnitude are reigniting inflationary pressure, eroding competitive advantage from the cost side at a time when corporate profits remain weak (see The domestic economy: Sectoral trends for a further discussion of the impact of the won’s weakness on specific sectors). For the time being, therefore, further cuts in interest rates appear to be out of the question; the Bank of Korea (BOK, the central bank) last lowered interest rates in February this year, when it announced that it would guide its current target rate, the overnight call rate, down by 25 basis points, to 5%.
The BOK and MOFE In order to limit the won’s depreciation against the US dollar, the BOK continue bickering announced in early April that it would be prepared to intervene directly in currency markets by using foreign-exchange reserves to buy won. The announcement was not, however, co-ordinated beforehand with the Ministry of Finance and Economy (MOFE). As a result, as has often happened since the BOK was made formally independent from MOFE, MOFE was quick to repudiate the BOK’s announcement as “an expression of principle” and stressed that it was MOFE and not the BOK that was responsible for managing foreign-exchange reserves. Underlying the current disagreement between the two is MOFE’s belief that the won should be allowed to reach a level consistent with maintaining South Korean exporters’ competitiveness on world markets and the BOK’s concern that to do so would raise import prices and so stoke domestic inflationary pressures.
Economic reform slows The present government is the first ever in South Korea with an avowed commitment to free-market principles. Having taken over in the wake of the 1997 financial crisis, Kim Dae-jung steered in a liberal rather than a populist direction—against expectations. The years since 1997 have seen important economic restructuring, but much remains to be done. Of late, however, the gap between rhetoric and reality has been widening. With economic growth slowing and widespread “reform fatigue” among voters—increasingly important as the next presidential election approaches—economic reform appears increasingly to be taking second place to stabilisation and consolidation. This shift has been well illustrated in the government’s policy U-turn towards one of the largest chaebol (conglomerate), Hyundai.
Almost all of the main companies in the Hyundai group have financial problems. Not only did its flagship company (and the country’s largest general contractor), Hyundai Engineering and Construction, come close to bankruptcy several times in 2000—it has since been taken under the control of its creditors—but there is also concern over Hynix Semiconductor (formerly Hyundai Electronics), which was forced to absorb LG Semicon under its recent “Big Deal” rationalisation programme, and which is burdened with some W11.4trn (US$8.9bn at an exchange rate of W1,275:US$1) of debt and W1trn in annual interest payments. Hyundai Asan, which is owned by seven Hyundai affiliates and was set up to manage the North Korean tourist project, is also ailing, with the number of tourists using its tours falling far short of the 500,000 per year needed for the project to become self-sufficient. So poor are the company’s finances that it may soon be unable to pay North Korea the agreed US$12m per month for the privilege of running the project.
EIU Country Report May 2001 © The Economist Intelligence Unit Limited 2001 22 South Korea
A bail-out plan for Hyundai Despite the group’s financial difficulties, the government seems determined to is announced keep it afloat, even brokering a bail-out plan in early 2001, in which the state- owned Korea Development Bank, which is one of the group’s main creditors, will buy W1.5trn and W2.7trn of the maturing bonds issued by Hyundai Engineering and Construction and Hyundai Electronics, respectively. Other group companies are set to benefit in a similar way. The government’s attitude to Hyundai is in direct contrast to its (encouraging) willingness to let Daewoo, which had been the second largest chaebol, fail in 2000.
In part the government’s lenient attitude to Hyundai relates to its vital economic role in Kim Dae-jung’s pro-engagement North Korea policy— although this role may diminish following the death of the group’s founder, Chung Ju-yung, in March. In addition to the tourism project, Hyundai also plans to build an industrial complex at Kaesong in the North, just over the demilitarised zone and 50 km from Seoul, although it is unclear how, given its current problems, it will find the funds even to begin the project. While understandable in the political context, the bail-out undermines the credibility of the chaebol reform programme—which is one of the main platforms of the government’s wider economic reforms—in which weak companies are allowed to fail. Hyundai’s weakness also increases the systemic risk in the banking system, retarding the return of the still ailing domestic banks to financial health.
The domestic economy
Output and demand
Real GDP growth slows in Real GDP growth slowed again in the fourth quarter of 2000, both reflecting the fourth quarter the high basis for comparison in the fourth quarter of 1999 and owing to the impact of a less buoyant world economy on the domestic market. In seasonally adjusted terms real GDP actually contracted by 0.4% year on year during the quarter. The slowdown during the period was led by a deceleration in manufacturing and construction output on the supply side and by slowing investment, export and import growth on the demand side.
Private consumption and Year-on-year growth in private consumption and investment was particularly investment growth flag slow in the fourth quarter, with the latter delivering its worst performance since the first quarter of 1999. This partly reflected the deterioration in the external environment—mainly slowing growth in the two main export markets, the US and Japan—which resulted in the slowest rate of growth in exports of goods and services since the second quarter of 1999. Slower domestic demand growth also lay behind the deceleration in growth in imports of goods and services to under 10%, the slowest rate of increase since the last quarter of 1998, when import volumes were still contracting.
EIU Country Report May 2001 © The Economist Intelligence Unit Limited 2001 South Korea 23
South Korea: expenditure on gross domestic product, 2000 (% change, year on year; constant 1995 prices) 1 Qtr 2 Qtr 3 Qtr 4 Qtr Year Private consumption 10.8 8.9 5.7 3.2 7.1 Government consumption 1.5 1.1 0.5 1.8 1.3 Gross fixed capital formation 21.9 13.2 10.5 1.6 11.0 of which: construction –6.8 –4.2 –3.5 –2.5 –4.1 machinery & equipment 62.6 41.6 31.9 8.1 34.3 Exports of goods & non-factor services 27.1 21.4 22.5 16.4 21.6 of which: goods 31.5 22.7 25.2 18.9 24.2 Imports of goods & non-factor services 31.6 20.6 22.4 8.2 20.0 of which: goods 35.4 21.8 21.6 8.5 21.1 GDP 12.6 9.7 9.2 4.6 8.8
Source: Bank of Korea.
Manufacturing slows In the fourth quarter of 2000 the growth rate of manufacturing in national sharply accounts terms also slowed sharply (and actually contracted by 2.7% year on year in seasonally adjusted terms). Again this slowdown reflected the deceleration in domestic demand and the deterioration of export conditions during the quarter. The quarter also showed little respite for the construction industry, with a further contraction in national accounts terms, although the decline was shallower than in previous quarters. The sector has now registered year-on-year contractions in GDP terms in every quarter since the fourth quarter of 1997. Non-GDP data for the sector paint a similarly bleak.
South Korea: gross domestic product by industry, 2000 (% change, year on year; constant 1995 prices) 1 Qtr 2 Qtr 3 Qtr 4 Qtr Year Agriculture, forestry & fishing 1.1 –1.8 –2.1 2.0 0.1 Manufacturing 22.3 16.9 17.7 6.5 15.4 Electricity, gas & water 18.7 11.4 10.8 9.3 12.6 Construction –7.9 –3.9 –2.8 –1.6 –3.7 Services 12.0 10.3 8.7 5.5 9.0 Source: Bank of Korea.
Industrial production In the fourth quarter seasonally adjusted data for manufacturing on an index growth slows basis show that production in the sector continued to rise in year-on-year terms, albeit at a slower rate than in recent quarters, but contracted in quarter- on-quarter terms. These developments confirmed the overall deterioration in the economy seen in the GDP data for the quarter. Slower growth was recorded even in the hitherto booming “new economy” sectors, such as electrical machinery, and radios, televisions and communications equipment. In the previous two quarters these two sectors had notched up year-on-year growth rates of nearly 20% and 40-50%, respectively. Production also contracted in quarter-on-quarter terms in both sectors in the last quarter of 2000.
EIU Country Report May 2001 © The Economist Intelligence Unit Limited 2001 24 South Korea
South Korea: seasonally adjusted manufacturing production (1995=100; period averages) 1999 2000 % 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr changea Food & beverages 107.2 105.8 103.6 108.6 106.3 –0.8 Textiles 84.7 86.1 84.1 82.8 77.0 –9.1 Clothing 69.6 69.8 72.8 76.7 68.8 –1.1 Chemicals & products 138.5 138.9 140.2 144.1 140.7 1.6 Rubber & plastics products 107.2 107.5 104.0 109.7 105.0 –2.1 Basic metals 121.0 123.1 124.3 120.5 121.4 0.3 Fabricated metal products 86.4 87.0 86.8 86.9 80.6 –6.7 Non-electrical machinery 96.2 107.2 112.8 114.0 104.7 8.8 Radio, TV & communications equipment 349.3 354.4 390.8 458.1 426.4 22.1 Office, accounting & computing machinery 422.0 503.3 440.7 585.9 514.1 21.8 Electrical machinery 110.2 118.5 117.4 121.3 115.1 4.4 Motor vehicles & trailers 127.2 130.4 120.1 139.5 127.9 0.6 Other transport equipment 211.5 209.1 202.8 193.1 193.2 –8.6 Manufacturing 145.5 148.6 150.3 162.9 156.3 7.4
a 4 Qtr 2000/4 Qtr 1999.
Source: Bank of Korea, Monthly Statistical Bulletin.
Domestic construction As seen in the GDP data, domestic construction remains depressed and may flags even be on the verge of a new recession. Year-on-year growth in volume (area of permits for building construction) and value terms was generally strong in first three quarters of 2000, but slowed sharply towards the end of the year and continued to falter in the first two months of 2001. The financial problems at two of the country’s largest construction companies, Hyundai Engineering and Construction and Dong Ah Construction (see Sectoral trends) underline the severity of the problems currently facing the sector. Overseas orders, meanwhile, are faring better in value terms, with orders received in the first quarter of 2001 up by 29% year on year to just over US$1bn, according to the International Contractors Association of Korea. In volume terms, however, the picture is less rosy, with the number of contracts won by South Korean firms down by nearly 44% to 18 during the period.
South Korea: construction indicators
2000 2001 Oct Nov Dec Year Jan Feb Permits for building construction (m sq metres) 7.16 6.68 6.47 81.06 5.20 4.58 % change, year on year –7.5 –55.3 –56.7 11.8 2.7 –4.8 Domestic construction orders received (W trn) 30.59 33.64 50.61 417.78 22.86 24.30 % change, year on year –15.9 –33.1 0.7 15.1 –32.1 –14.6 Source: Bank of Korea.
EIU Country Report May 2001 © The Economist Intelligence Unit Limited 2001 South Korea 25
Employment, wages and prices
The labour market slackens As the economy slows, the labour market has started to slacken. The unem- ployment rate reached a 17-year high of 8.6% in February 1999, following corporate and financial restructuring efforts that led to widespread layoffs from early 1998. In the latter part of 1999, however, the economic recovery stimulated demand for labour once more, with the result that unemployment was back at frictional levels of just under 4% by mid-2000. This was despite considerable restructuring in the labour market, as people left the security of banks and industrial conglomerates for new start-ups.
However, the current economic slowdown, combined with a more generous state-funded benefit system that has led to more unemployed workers registering as jobless with the authorities, have started to push the number of jobless up again. Thus seasonally unadjusted unemployment rose to 5% in February this year, up from 4.6% in January, a rise which the National Statistical Office (NSO) attributed partly to seasonally reduced hiring in the wholesale, retail, restaurant and lodging, and manufacturing sectors.
South Korea: employment (m unless otherwise indicated) 2000 2001 Oct Nov Dec Jan Feb Mar Labour force 22.33 22.16 21.75 21.27 21.27 21.76 Employed 21.57 21.37 20.86 20.29 20.20 20.73 of which: manufacturing 4.33 4.34 4.28 4.22 4.16 4.18 Unemployment ratea (%) 3.4 3.6 4.1 4.6 5.0 4.8
a Not seasonally adjusted.
Source: National Statistical Office, Monthly Statistics of Korea.
Wage growth slows Year-on-year growth in manufacturing wages slowed in the fourth quarter of towards end-2000 2000 to just 5.6%, the slowest rate of increase since the fourth quarter of 1998, when wages began to rise again following several quarters of contraction. Despite the slowdown, however, continued muted inflationary pressures during the period meant that workers still enjoyed healthy increases in real terms. The economic slowdown showed through in December in a 4.2% year- on-year reduction (in nominal terms) in “special payments”, which are chiefly performance and profit-related. Total nominal wages in all industries rose by 8% in the whole of 2000, slightly below the rate for manufacturing; overtime payments rose by 13.7% overall in 2000, reflecting a tight labour market and buoyant export growth in the earlier part of the year; and special payments rose by 8.1%.
EIU Country Report May 2001 © The Economist Intelligence Unit Limited 2001 26 South Korea
South Korea: wages in manufacturing industry (W per month unless otherwise indicated) % change Earningsa year on year 1998 1,284,477 –3.1 1999 1,475,500 14.9 1 Qtr 1,366,426 9.1 2 Qtr 1,416,129 13.8 3 Qtr 1,506,334 19.2 4 Qtr 1,608,518 16.3 2000 1,601,468 8.5 1 Qtr 1,497,521 9.6 2 Qtr 1,535,639 8.4 3 Qtr 1,671,450 11.0 4 Qtr 1,698,488 5.6
a Period averages.
Source: Bank of Korea.
Inflation rises The price level came under pressure from both domestic cost rises and imported inflation in the first three months of 2001. Consumer prices rose by more than 4% year on year in each of the first three months; services price rises, especially for tuition fees, and higher food prices because of supply shortfalls were behind the overall rise in prices. According to NSO data, “core inflation”, which strips petroleum and agricultural products other than cereals out of the consumer price index (CPI), was running at the same rate as the CPI in January-February, fuelling worries about the inflationary consequences of further falls in interest rates and the weakening won. Producer prices also accelerated in the first three months of the year, reflecting higher commodity and utility prices. The won’s recent weakness against the US dollar contributed to sharp rises in export and import prices in year-on-year terms during the period.
South Korea: price indicators (% change, year on year) 2000 2001 Oct Nov Dec Jan Feb Mar Consumer prices 2.8 2.6 3.2 4.2 4.2 4.4 Producer prices 1.8 1.3 1.7 2.3 2.4 2.8 Export prices (won terms) –5.5 –3.4 4.2 8.9 6.1 8.6 Import prices (won terms) 2.2 3.9 5.3 9.5 8.2 8.9 Source: Bank of Korea.
Financial indicators
M1 growth accelerates Having slowed at end-2000, the rate of growth of M1 (currency in circulation and demand deposits) rose sharply in year-on-year terms in January-March 2001. Reasons for the rapid increase include the traditionally high demand for cash during the Chinese New Year in January and lower savings rates at banks, which has lessened the incentive to hold time deposits. Year-on-year M2 (M1
EIU Country Report May 2001 © The Economist Intelligence Unit Limited 2001 South Korea 27
plus quasi money) growth remained rapid in the first quarter of 2001, although slower than in recent months owing to sluggish bank lending growth and to slowing inflows of foreign currency. Growth in M3 (M2 plus deposits at non- banking financial institutions, or non-banks) continued to lag well behind M1 and M2 as investors have shied away from non-banks.
South Korea: money supply trends (W trn unless otherwise indicated; end-period) 2000 2001 Oct Nov Dec Jan Feb Mar M1 430.0 418.7 470.0 436.8 430.0 418.0 % change, year on year 17.9 15.0 5.9 12.4 12.3 18.8 M2 3,994.7 4,055.6 4,130.5 4,125.6 4,080.4 4,106.5 % change, year on year 27.8 25.5 25.4 23.6 17.9 17.1 M3 9,027.7 9,120.7 9,116.4 9,190.5 n/a n/a % change, year on year 6.7 6.6 7.2 7.7 n/a n/a Source: Bank of Korea.
Interest rates remain stable Having cut its target overnight call rate by 25 basis points to 5%, in February, the Bank of Korea (BOK) left rates unchanged in March and in April, mainly owing to concerns that lower domestic rates would put further downward pressure on the already beleaguered currency and so stoke inflationary pressures. Since the beginning of 2001 the nominal yield on the three-year Treasury bond has remained stable, generally fluctuating between 5% and 6%. The spread between the three-year Treasury bond and the benchmark three- year corporate bond widened slightly during the period compared with end- 2000, suggesting a slight increase in risk aversion on the part of investors as the economic outlook deteriorated. That said, at less than 8%, nominal corporate bond yields remained low and stable by recent standards.
Further stock boosting South Korea has not been immune to the effects of collapsing confidence in measures are planned technology stocks in the US and Europe and the prolonged slump in Japan. As a result, the benchmark Korea Composite Stock Price Index (KOSPI) generally delivered a poor performance in the latter part of 2000 and the early part of 2001, slumping to lows not seen since 1998. In an attempt to boost stock
EIU Country Report May 2001 © The Economist Intelligence Unit Limited 2001 28 South Korea
prices, the government has indicated that it will use another W3trn (US$2.4bn at an exchange rate of W1,275:US$1) in funds from state-run pension funds to buy shares on top of the W1.8trn it has already used since October 2000. The performance of the KOSDAQ, which, like its counterpart in the US, the NASDAQ, is also heavily weighted towards technology stocks, was similarly disappointing during the period.
South Korea: financial market indicators (end-period unless otherwise indicated) 2000 2001 Oct Nov Dec Jan Feb Mar KOSPIa (Jan 4th 1980=100) 514.5 509.2 504.6 617.9 578.1 523.2 Overnight won rate (%) 5.4 5.4 5.4 5.4 5.1 5.2 3-year Treasury bond 7.6 7.2 6.7 5.7 5.4 6.3 3-year non-guaranteed corporate bond (%) 8.6 8.4 8.1 7.5 6.8 7.7 W:US$ 1,137.0 1,215.5 1,265.0 1,257.5 1,131.5 1,254.0
a Korea Composite Stock Price Index.
Source: Bloomberg.
FDI commitments fall in In March this year the value of foreign direct investment (FDI) commitments March in South Korea stood at US$800m, a fall of 19.1% year on year. The number of commitments also fell year on year in the month, by 12.4%. The value of FDI commitments was similarly disappointing in February. This relatively poor performance suggests that with US growth slowing and Japan’s recovery faltering, foreign investors are becoming more wary of “risky” assets in emerging markets such as South Korea. Total first-quarter FDI commitments rose by 64.5% year on year. If, however, January’s US$3bn foreign purchase of a share of SK Telecom is excluded, total commitments would have fallen by 77% year on year during the period. Commitments by Japanese investors fell by nearly 30% year on year to just US$184m in the first three months of the year. In the light of the subdued outlook for the world economy in general and for the technology sector in particular, FDI commitments may well fall short of the US$15.7bn recorded in 2000.
Sectoral trends
The won’s depreciation is Although generally increasing export competitiveness, the won’s recent not unmitigated good news weakness against the US dollar also has less benign implications for large swathes of South Korea’s industry. Shipbuilding suffers least, gaining price competitiveness (albeit not against Japan, as the yen has fallen faster), while facing only indirect rises in the cost of inputs such as steel. At the other extreme, the country’s two airlines, Korean Air and Asiana Airlines—which must also bear the costs of moving their operations from Kimpo to the new airport at Inchon—and oil refiners are the worst hit, as already expensive fuel becomes even more so. Surveys suggest that few South Korean businesses in any sector have hedged against a depreciating won, perhaps expecting it to continue the steady upward trend that obtained from 1998 to late 2000.
EIU Country Report May 2001 © The Economist Intelligence Unit Limited 2001 South Korea 29
In between these extremes falls the electronics and information-technology industries, whose high reliance on imported components means little net gain from devaluation. Although the government is trying to localise production of components for use in such mainstay exports, dependence on imported inputs is, if anything, increasing. Thus, according to Bank of Korea data, in 1999 the value of imports for use in exports rose to 46.7% of the total import bill, up from 31.7% of the total in 1994.
The EU complains about According to an article in early April in one of South Korea’s leading daily subsidies to shipbuilders newspapers, Chosun Ilbo, shipbuilding is the only sector not now facing sluggish overseas sales. Although the won has not fallen as much as the yen has against the US dollar this year, in both 1999 and 2000 South Korean shipbuilders beat their Japanese rivals to lead the world in new orders. South Korea now has 50% of the global market for ships, while Japanese firms are belatedly restructuring. The only obstacle to further expansion of the sector is the EU, which attributes this success to underpricing made possible by hidden subsidies from the government and has begun the process of taking South Korea before the World Trade Organisation (WTO).
The construction industry’s Construction is one sector that never really recovered from the 1997-98 woes continue financial and economic crises. Years of underpricing to win overseas contracts left firms unprofitable (and in some cases, like Iraq, unpaid), and business has been slow to pick up since. Despite attempts by the government to help by front-loading large-scale public works projects allocated in the 2001 budget to the first months of this year, two big names in the sector have now been brought low.
The bankruptcy of one of the country’s leading construction firms, Dong Ah Construction—responsible for Libya’s “great man-made river project”, the world’s biggest civil engineering project—has made waves in two directions. One is obviously with Libya, which may sue if work is broken off, just as Poland’s government threatens legal action to maintain its joint venture with Daewoo Motor, which was Poland’s biggest foreign investor. The other is Dong Ah’s brazen request to be discharged from bankruptcy on the ground that its slump was not as severe as its accounts suggested, because earlier
EIU Country Report May 2001 © The Economist Intelligence Unit Limited 2001 30 South Korea
reports of profits had been fiddled. It added that this was normal practice. With the collapse of the Daewoo group too now alleged to be a result of massive fraud, this sheds an unflattering light on South Korea’s accountants and in particular auditors, which will not ease foreign investors’ fears about corporate governance.
HEC falls to its creditors Some, however, are too big to fail. So one must conclude from the ongoing and ever sorrier saga of the country’s largest general contractor, Hyundai Engineering and Construction (HEC) and the nominal flagship of the Hyundai group. On March 29th HEC’s creditors in effect took it over in a debt-for-equity swap, after losses of W3trn in 2000 wiped out the firm’s capital base. Yet this only widens the rot: HEC’s lead creditor, Korea Exchange Bank (KEB), promptly saw its own credit rating downgraded to reflect this exposure. Like other banks, KEB is largely state-owned after being rescued following the 1997-98 financial crisis. The government’s switch from harrying to propping up reflects the need to reward Hyundai for its role in opening up North Korea, a role which may not survive the death in March this year of Hyundai’s Northern-born founder Chung Ju-yung, and the fear that another failure like that of Daewoo would precipitate a chain of knock-on bankruptcies among small suppliers, or even a second financial crisis.
The banking sector is itself active, if in ways hard to square with the avowed policy of encouraging more autonomy. The government remains highly interventionist, not only bullying nominally private banks—even if foreign- owned, like Korea First Bank—to rally round and bail out Hyundai, but also pressing even healthy banks to merge to create national champions. So Kookmin Bank and Housing & Commercial Bank are due to merge, despite labour protests, analysts’ doubts that they are complementary (both are mainly retail banks) and management power struggles over the structuring of the new entity. Unsurprisingly this marriage is behind schedule.
Woori Financial Holdings is Another state creation, Woori Financial Holdings (WFH), was launched on launched April 1st. WFH is South Korea’s first financial holding company, comprising Hanvit Bank and four smaller failed banks. Here the basic strategy is sound— better than the earlier wheeze of attaching weak banks to strong ones—but competitors will watch to see that the playing field is not tilted too far towards the newcomer. WFH does not include KEB at the insistence of KEB’s second- largest shareholder, Commerzbank of Germany, nor the failed SeoulBank, which is still awaiting a buyer since its planned sale to HSBC collapsed in 1999.
The Samsung Economic Research Institute (SERI), the think-tank of Samsung, which is now the largest chaebol (conglomerate), has listed what it sees as South Korea’s ten most competitive sectors for the new century. These are semiconductors, information and telecommunications, digital home electronic appliances, electronic commerce, “contents” (software, etc), vehicles, ships, precision components, textiles and bio-engineering. There are no great surprises here. Of the three “old economy” stalwarts, textiles is included as a high value-added area (South Korea long ago moved upmarket in this sector) despite low growth potential, while the motor and ship industries are assemblers with important linkages to other sectors.
EIU Country Report May 2001 © The Economist Intelligence Unit Limited 2001 South Korea 31
The Internet offers huge Most interesting, however, is the “new economy”. South Korea’s swift and opportunities effective embrace of the Internet—it leads the world in online stock trading, broadband connectivity, and person-hours spent online—gives hope that South Korea can reinvent itself yet again, to both adapt to and benefit from a changing environment. The further hope that this will create a more balanced economy, as new “dotcom” companies arise and displace the lumbering chaebol, is less certain but much to be encouraged. The fact that in this area South Koreans are palpably ahead of Japan offers not only satisfaction but a basis for a more equal future co-operation. Japanese venture capital firms are already funding South Korean start-ups, while the latter see Japan as the obvious next market to crack after their own.
Foreign trade and payments
The trade surplus rises Preliminary data from the government show that South Korea recorded a cumulative merchandise trade surplus (customs-cleared basis) of US$2.4bn in January-March 2001, an improvement on the surplus of just US$437.8m recorded in the first three months of 2000. This improved performance was mainly the result of the 2% year-on-year decline, to US$38.1bn, in the merchandise import bill. Export revenue growth was sluggish over the quarter, at just over 3% year on year (rising to US$40.5bn), reflecting the slowdown in demand for South Korean goods in the two main markets of the US and Japan.
Dependence on electronics Detailed data for trade in 2000 have been published. They confirm the remains high important role of electronic products in South Korea’s export mix, making up 36% of the total in 2000, with semiconductors alone accounting for just over 12% of total exports and information and communication equipment for just over 16%. These categories of exports showed rapid growth in 2000, as did passenger cars, mainly reflecting robust demand for these products in the US market. Revenue from exports of metal goods (including steel) was disappointing by the standards of that earned from sales of electronic goods, partly reflecting falling prices as US demand growth decelerated from mid-year.
EIU Country Report May 2001 © The Economist Intelligence Unit Limited 2001 32 South Korea
Imports outpace exports, The value of imports rose by 34% in customs terms in 2000 compared with reflecting price rises a rise of 20% for exports. The rise in the import bill was driven by large price rises for fuels and industrial materials. The value of imports of capital goods, meanwhile, was boosted by the recovery in investment in plant and equipment while imports of electric and electronic equipment and of goods for domestic use were boosted by the strength of the domestic economy.
South Korea: exports and imports of selected commodities (US$ m) 1999 2000 % change Total exports incl others 143,685 172,268 19.9 Electronic products 45,807 62,043 35.4 of which: information & communications equipment 16,742 28,120 68.0 semiconductors 18,850 21,275 12.9 electronic home appliances 5,733 7,033 22.7 Chemicals & chemical products 9,409 12,145 29.1 Food 2,951 2,792 –5.4 Machinery & equipment 11,594 11,997 3.5 Crude materials & fuels 7,847 11,572 47.5 of which: petroleum & derivatives 5,771 9,330 61.7 Metal goods 10,308 11,362 10.2 Passenger cars 9,417 11,102 17.9 Fabric 7,998 8,523 6.6 Ships 7,490 8,229 9.9 Clothing 4,869 5,024 3.2 Rubber tyres & tubes 1,486 1,421 –4.3 Total imports 119,752 160,481 34.0 For domestic use 63,777 88,214 38.3 For export 55,975 72,268 29.1 Industrial materials & fuels 57,253 78,975 37.9 of which: crude petroleum 14,783 25,216 70.6 chemicals & chemical compounds 9,796 11,838 20.8 iron & steel products 4,750 6,007 26.5 light industry inputs 4,185 4,845 15.8 non-ferrous metals 4,015 4,845 20.6 minerals 3,578 4,191 17.2 Capital goods 48,488 65,433 34.9 of which: electric & electronic machinery 31,673 43,293 36.7 of which: semiconductors 16,059 19,696 22.6 machinery & equipment 13,514 18,426 36.3 information & communication equipment 6,999 12,385 76.9 transport equipment 2,393 2,816 17.7 Food & consumer goods 14,012 16,074 14.7 of which: consumer durables 6,397 6,424 0.4 consumer non-durables 1,623 2,549 57.0 cereals 2,320 2,438 5.1 Source: Bank of Korea.
EIU Country Report May 2001 © The Economist Intelligence Unit Limited 2001 South Korea 33
The current-account The 41.5% fall in the merchandise trade surplus (fob-fob) in 2000, to surplus shrinks US$16.6bn, the rise in the services deficit (trade- and outward tourism- related) and the fall in inward transfers cut the current-account surplus sharply in 2000, to US$11bn, down from nearly US$25bn in 1999. The income deficit narrowed markedly, however, as a strong world economy boosted inflows of income from investment abroad, despite a higher debt- service burden in absolute terms, which raised outflows of interest paid.
South Korea: current- and capital-account balances (US$ m unless otherwise indicated) 1999 2000 % change Merchandise exports fob 145,164 175,782 21.1 Merchandise imports fob –116,793 –159,181 36.3 Trade balance 28,371 16,601 –41.5 Services balance –651 –3,974 510.5 Income balance –5,159 –2,200 –57.4 Current transfers 1,916 617 –67.8 Current-account balance 24,477 11,044 –54.9 Capital & financial account balance 2,040 11,727 474.8 Source: Bank of Korea.
Total foreign debt falls According to government data, South Korea’s stock of foreign debt stood at US$136bn at end-2000, down by nearly US$1bn on the end-1999 level. (These data differ from our debt data, which are presented in the Economic structure table on page 8.) Long-term debt fell by US$5bn over the year, as the liabilities of the public sector and financial institutions fell, while those of domestic companies rose. Short-term debt, by contrast, rose by 12.7% year on year, to stand at just over US$44bn, mainly as a result of trade-related financing. In early 2001 the Bank of Korea (the central bank) announced that it would repay all of its outstanding US$5.8bn worth of credit drawn under the end-1997 package put together under IMF auspices by August 2001. Early repayment of IMF obligations was partly responsible for the slight dip in foreign reserves at end-March to US$94.4bn from US$95.3bn at end-February. Reserves neverthe- less remain high, providing, the government hopes, ample insurance against a run on the currency along the lines of the end-1997 crisis.
South Korea: external liabilities (US$ m) 2000 2001 Sep Oct Nov Dec Jan Feb Public sector 28,969 28,616 28,555 27,902 26,859 25,730 Financial institutions 53,450 51,516 50,699 51,174 49,407 49,145 Long term 30,222 27,812 27,563 27,336 27,064 26,956 Short term 23,228 23,704 23,136 23,838 22,343 22,189 Domestic companies 58,102 58,286 57,391 57,230 57,150 56,794 Long term 34,544 35,860 35,699 36,849 37,176 37,139 Short term 23,558 22,426 21,692 20,381 19,974 19,655 Total 140,521 138,418 136,645 136,306 133,416 131,669 Source: Bank of Korea.
EIU Country Report May 2001 © The Economist Intelligence Unit Limited 2001 34 North Korea
North Korea
Political structure
Official name Democratic People’s Republic of Korea
Form of government One-party rule, based on the ideology of juche (self-reliance)
The executive Constitutional revisions in September 1998 abolished the Central People’s Committee, renamed the State Administration Council as the cabinet, and reaffirmed the National Defence Commission (NDC) as the highest state body, albeit nominally under the Supreme People’s Assembly (SPA)
Head of state In September 1998 Kim Il-sung (who had died in 1994) was dubbed “eternal president”. The president of the SPA Presidium performs the formal duties of the head of state, but ultimate executive power lies with the chairman of the NDC
National legislature Unicameral 687-member SPA, directly elected for five-year terms. Its Presidium, formally the Standing Committee, substitutes for the legislature when the SPA is not in session
Regional legislatures Each province, city, county or district elects people’s assemblies or committees. These committees elect local officials to carry out centrally decided policies
National elections The tenth SPA was elected on July 26th 1998, more than three years late. The next SPA election is due by 2003. These are communist-style elections, with a single list of candidates; claimed turnout and “yes” votes approach 100%
National government The Korean Workers’ Party (KWP) controls all arms of the state. Since the death of Kim Il-sung, military figures have had a growing influence
Main political parties Government: the KWP is nominally in coalition with the Social Democratic Party and the Chondoist Chongu Party
Key holders of state & National Defence Commission chairman Kim Jong-il party positions First vice-chairman Jo Myong-rok Vice-chairmen Kim Il-chol; Ri Yong-mu SPA Presidium president Kim Yong-nam Vice-presidents Yang Hyong-sop; Kim Yong-dae Prime minister Hong Song-nam Vice-premiers Jo Chang-dok; Kwak Bom-ki Key politburo members Kye Ung-tae; Chon Byong-ho
Key ministers Agriculture Ri Ha-sop Commerce Ri Yong-son Defence Kim Il-chol Finance Mun Il-bong Foreign affairs Paek Nam-sun Foreign trade Kang Jong-mo Light industry Ri Yon-su Metals & machine-building Jon Sung-hun Public security Paek Hak-nim
Chairman of the State Planning Commission Pak Nam-gi
EIU Country Report May 2001 © The Economist Intelligence Unit Limited 2001 North Korea 35
Economic structure
Annual indicators
1996 1997 1998 1999 2000 Real GDP growtha (%) –3.6 –6.3 –1.1 6.2 n/a Populationb (m) 21.7 21.8 21.9 22.1 22.2 Exportsa (US$ m) 730 910 560 520 n/a Importsa (US$ m) 1,250 1,270 880 960 n/a Trade balancea (US$ m) –520 –360 –320 –440 n/a Exchange rate (av; Won:US$) 2.15 2.20 2.20 2.20 2.20
April 20th 2001 Won 2.20:US$1
Origins of gross domestic product 1999a % of total Services 32.4 Agriculture, forestry & fishing 31.4 Mining & manufacturing 25.6 Construction 6.1 Electricity, gas & water 4.5 Total 100.0
Main destinations of exports 1995b % of total Main origins of imports 1995c % of total Japan 27.9 China 32.6 South Korea 20.8 Japan 17.2 China 5.2 Russia 4.7 Germany 4.0 South Korea 4.3 Russia 1.2 Germany 2.9 a Bank of Korea (Seoul) estimates. b Cited by Marcus Noland, The North Korean Economy, Institute for International Economics, Washington DC, 1995. c National Statistical Office (Seoul) estimates.
EIU Country Report May 2001 © The Economist Intelligence Unit Limited 2001 36 North Korea
Outlook for 2001-02
Political outlook
Domestic politics Internally North Korea’s political outlook remains stable. Its leader, Kim Jong-il, appears firmly in control of the government. As ever, little is known about intra-elite policy debates, which must take place, or any grass- roots unrest. One question is, however, whether the ruling Korean Workers’ Party (KWP) will hold a congress in the near future. Kim Jong-il hinted at this in 2000 and it is long overdue as the last one was in 1980. Of North Korea’s three overlapping power elites, the KWP is now less in evidence than either the visible military or the government, whose structure was overhauled in 1998. Where once the KWP Politburo ruled the roost, it is now unclear even who its members are, or whether the Central Committee actually meets. A new KWP congress could also signal the rise of a new generation, of which there are other signs, or even a turn to economic reform, signs of which as yet remain ambiguous.
Externally it is a different story. The mood of détente since the June 2000 North-South summit, already fraying, will deteriorate further. The new US administration of George W Bush marks a clear break with the engagement approach of its predecessor, showing no inclination to talk to North Korea, even though the previous president, Bill Clinton, almost went to Pyongyang to sign a missile deal in his last months in office. Mr Bush may eventually heed bipartisan pleas not to abandon this process, but for now relations have cooled.
International relations The recent deterioration in North Korea-US relations casts a wider pall and gives the North an excuse to slow the pace of rapprochement with South Korea. Other uncertainties also loom. Japan’s new prime minister, Junichiro Koizumi, may resume last year’s stalled bilateral talks, or he may heed hostile public opinion and remain as aloof as Mr Bush, so further isolating Kim Dae-jung. In that case Kim Jong-il can revert to old friends. His two trips to China in nine months (after a 17-year gap) will be matched towards end- 2001 by a visit by China’s president, Jiang Zemin. If US-China ties worsen— whether over US national missile defence (NMD) plans, Taiwan, or the Hainan jet incident—China may become more actively supportive of North Korea and less inclined to assist Western efforts to bring the North into line. Russia may do the same, by selling North Korea new jet fighters and other arms. Yet Kim Jong-il, if no longer a recluse, will remain an enigma.
A new external factor is a more active Europe. After the North’s success in forging ties with almost all EU member states—only France and Ireland are still holding out—the EU will send a mediation mission to both Koreas in May this year, comprising Sweden’s prime minister, Goran Persson, the EU’s foreign and security policy head, Javier Solana, and the European commissioner for external relations, Chris Patten. Despite claims of co-ordination, this is a clear implicit rebuke to the US and a bid to dispel the new clouds over the South’s “sunshine policy”. As such it will please the South’s president, Kim Dae-jung, as well as Kim Jong-il who boasts of waiting for the world to come to him. The
EIU Country Report May 2001 © The Economist Intelligence Unit Limited 2001 North Korea 37
EU may also open formal relations with North Korea, unless France objects. Whether this signals any lasting and deep engagement, or just an easy opportunist gesture, remains to be seen.
Economic policy outlook
Economic policy By normal standards North Korea’s economic outlook remains dire. The country still suffers from both food shortages and a wider crisis of its old Soviet-style industrial base, which has all but collapsed since Soviet aid ended a decade ago. However, neither the halving of GDP in the 1990s, nor even famine, have yet induced the regime to follow China and Vietnam and move unambiguously towards reform and markets. Hopes raised by earlier hints and by Kim Jong-il’s clearly business-oriented trip to Shanghai (February 2001, page 37) are as yet unmet. The parliamentary session held in April this year and the budget produced no great change.
Shanghai was the clearest signal yet that Kim Jong-il does grasp the need for the country to change, but the problem is what to do and the method of implementation. The path taken by China’s late leader, Deng Xiaoping, might not work in an already industrial, albeit tattered economy. Failure would stir political opposition from hardliners, while pitching a U-turn as fidelity to Kim Jong-il’s father, Kim Il-sung, will tax KWP ideologues’ scholastic agility. So far there are two tactics: saying that new times need fresh approaches; and a stress on science and technology. The latter raises fears that Kim Jong-il may think a technical fix is enough, rather than, in Marxist terms, changing the relations of production from socialism back to capitalism.
Without market reforms, North Korea’s economy cannot recover. Periodic reports that things are looking up must be taken in that context. More aid may improve plant operation rates, but this does not overcome the defects of either the plants themselves or the system within which they operate. Similarly, the claims by the South’s central bank, the Bank of Korea, that the North’s GDP grew by just over 6% in 1999—there are no figures for 2000 yet—at best reflect external transfers and aid infusions rather than real economic recovery.
Prospects thus depend above all on aid and reform. The infrastructural aid promised by Kim Dae-jung in the “Berlin Declaration” of March 2000 (May 2000, pages 5-6) has barely begun. The relinking of a railway across the demilitarised zone (DMZ) is running late, owing to North Korean delays and the South’s refusal for technical reasons to meet the North’s demand for instant electricity. A colder political climate will slow the flow of aid, as critics question its value without matching reforms, or fear its diversion to a still menacing and expensive military machine. So a hobbled economy may continue to limp along, the only question being the severity of the limp.
EIU Country Report May 2001 © The Economist Intelligence Unit Limited 2001 38 North Korea
The political scene
There are few overt Early 2001 saw few overt political developments either at home or abroad. political developments After the excitement of his week in Shanghai in January, Kim Jong-il was invisible for over a month, as often in the past. Behind the scenes debate doubtless continued on reform—whether, when and how far—but little percolated to the surface. January’s hints of change were, however, not followed up.
Parliament meets—for a The Supreme People’s Assembly (SPA), the rubber-stamp parliament, met as day usual in April, but only for a day, less even that its customary three days. Kim Jong-il was there, flanked by the SPA Presidium president and, as such, titular head of state, Kim Yong-nam, and the most powerful military leader, vice-marshal Jo Myong-rok. Others on the platform were the usual names, with some changes of rank order. Party secretary Kim Yong-sun, a key figure in North-South dialogue, seems to have been promoted: he was listed fifth, after the three aforementioned and the prime minister, Hong Song-nam.
The premier reports “great Unusually, there was a keynote speech by Hong Song-nam. His tone was progress” heroic, even if the content undermined this. In one breath he reported “great progress in laying the economic foundations for … prosperity”; but in the next he added that “the most urgent task … is to improve the people’s standard of living … Every effort must be exerted to resolve the food problem”. In that light, to praise the “brilliant fruition of the tested leadership provided by the [KWP]” might be seen as ironic anywhere else.
Hints of change included talk of “readjusting the present economic foundations”, and even “a radical turn” in economic policy. Details were lacking, but emphasis on new technology suggests change is conceived as a technical fix, rather than embracing the market. Hong Song-nam also reaffirmed that “the cabinet will continue to direct great efforts to increasing in every way the military power of the country, taking the army-first … line of the party as a lifeline”. That has more than just political implications. Seoul sources reckon that the “second economy”, as the military-industrial complex is known, is twice as large as the official civilian one. Such skewed resource allocation further hobbles the potential for economic recovery.
The domestic economy
A budget is unveiled The SPA session is the one occasion when North Korea regularly reveals a few economic figures, albeit neither on a scale or in a form that would remotely satisfy the IMF or World Bank, which it supposedly wants to join. Even this tiny window closed for four years after the death of Kim Il-sung in 1994, when the SPA did not meet. On its resumption in 1999, the budget turned out to have fallen by over one-half on both sides of the ledger, a fact that the finance minister barely commented on.
EIU Country Report May 2001 © The Economist Intelligence Unit Limited 2001 North Korea 39
Yet even this vastly lower level of performance proved hard to sustain. In last year’s budget speech the then finance minister, Rim Kyong-suk, reported that in 1999 neither revenue nor spending had reached the target level of W20.4bn (US$9.26bn at the official exchange rate). Revenue was 2.8% short at W19.8bn, while spending of W20bn was 1.8% below that planned. Both of these figures were virtually identical with those for 1998. No breakdown was given on particular categories of spending, which quite often turn out to vary from the target announced a year earlier.
Now, however, things are looking up, according to the current finance minister, Mun Il-bong, in his first budget speech. In 2000 both income and spending came in over target by 2.4% and 2.7%, respectively. Revenue was W20.9bn and expenditure W21bn, giving a small deficit of W52m, down from W210m in 1999. On that basis, the targets for 2001—the financial year is the calendar year—of W21.6bn are realistic, being a modest 3.2% rise in income and 2.9% in spending; this is much less than the respective increases of 5.6% and 4.7% achieved in 2000 over 1999.
Defence accounts for some The minister also gave percentages of total spending accounted for by three 15% of total outlays categories of expenditure: the economy (40.1%), social services (38.2%), and defence (14.3%). The last is slightly less than the 14.5% expected in the budget for 2000, although the actual amount will be a little higher given the over- fulfilment in 2000. Defence spending is also planned at 14.5% of the total in 2001. This figure does not change much from year to year, but it may not mean much, for two reasons. Much other military spending is concealed; and the army plays a leading role in the civil economy, in construction and, increasingly, agriculture.
Statistical sleight of hand By contrast, the almost equal figures given for economic and social spending may explain social spending differ markedly from the situation up to 1994, when the former took the lion’s share of an admittedly much larger cake. In 1994 the economy was allocated 68% of the total budget, while social welfare received less than 20%. This divergence, plus the minister’s ambiguous phrasing—he spoke of “expenses for the enforcement of various popular policies, including additional expenditure for the betterment of the people’s living and free education and free health care”—suggests that some spending formerly classified as economic may have been recategorised as social. If so, the aim is political, to make it look as if more is being spent on people, rather than ploughed into investments with no immediate tangible payback.
For 2001, Mun Il-bong said “implementation of the popular policies”, presumably the same category, would be allocated a 2.5% funding increase. He also pledged an extra 2.7% “to upgrade such key departments in socialist economic construction as power, coal and metal industries and railway transport, increase the production of primary consumer goods and basic foodstuffs essential for the people’s living and radically boost agricultural production”, a large and heterogeneous category. For once, capital and current spending were distinguished; the minister committed W3.5bn (16.2% of the total budget) to “capital construction to push forward the construction of large-scale hydro-power stations, the Kaechon-Lake Taesong waterway project,
EIU Country Report May 2001 © The Economist Intelligence Unit Limited 2001 40 North Korea
land realignment … in South Hwanghae province, and the modernisation of chicken farms in Pyongyang”.
A partial revenue Unusually, some information, if only a sentence, was given on sources of breakdown is provided revenue. In 2001, 43.2% will come from turnover levies, and 32.9% from state enterprises’ profits. (The origins of the remaining 23.9% were not specified; they may include provincial and local revenues, or even the still officially unacknowledged private sector.) Turnover levies are essentially a tax on all transactions, most of them inter-industry, and have long been the government’s main source of revenue. Enterprise profits are a newer concept: state firms may well feel that they are paying twice over, but of course have no choice in the matter.
Operating rates rise A sign of some economic recovery comes from South Korean press reports that factory operating rates have improved. Aerial photographs taken in February of 69 North Korean industrial sites—their provenance was not disclosed—are said to show average operating rates of 77%, up from 46% three years earlier. Oil-refining and steel are running at near full capacity, as are thermal power stations at 87.5%. Chemical plants have risen to 61%, which means oil imports have resumed; how such imports are paid for is not known. While it is not clear how aerial photographs can offer this degree of precision, this is a plausible picture. Most North Korean industrial plant is, however, antiquated and worn out, so this slight recovery should not be mistaken for any new take-off.
Interest in the North In the absence of serious macroeconomic aggregates, one is left as ever with Korean IT sector grows sectoral news, much of it prospective and anecdotal. One development is a growing interest in the North Korean information technology (IT) sector, especially from small South Korean firms that are rushing to sign up deals. Recent examples include the following.
• Ntrack, a venture start-up, on March 26th announced a deal with Kwangmyongsung of North Korea to build an IT centre in Pyongyang. Final contracts were signed on March 17th, and a groundbreaking ceremony was due in April. Koryo Business Town, as it is called, will have a 30,000-sq metre site on Tongil street in Pyongyang’s western suburbs, and will make a range of IT components, in addition to training locals and even housing Southern start- ups. The first of seven buildings should be ready by August, with a 15-storey business centre planned for 2002. North Korea provides the site, water and electricity, leaving Ntrack responsible for all materials, technical manpower— and finance. The fact that Ntrack is now seeking partners for a consortium suggests this may not be quite as done a deal as first reports implied.
• Ntrack may compete with a separate venture also unveiled in March this year. Kim Jin-kyong, a US-Korean who runs a technology university in Yanbian—China’s ethnic Korean prefecture, which abuts North Korea—is to do the same in Pyongyang. This IT university is a North-South joint venture, its partners being a Christian foundation in South Korea and the North’s education ministry. A 100-ha site is earmarked, and here too groundbreaking was planned for April.
EIU Country Report May 2001 © The Economist Intelligence Unit Limited 2001 North Korea 41
• Politics is one pitfall, logistics another. Electric power is critical as brownouts are routine in Pyongyang. This is holding up Hanaro Telecom, which is ready to send staff to Pyongyang to start making asymmetric digital subscriber line (ASDL, capable of transmitting data at high speeds) components, but is still waiting for a formal invitation from its Northern partner, Samcholli.
• A site on the Chinese border may be a safer bet. So reasons a Seoul consulting firm that in February this year revealed a planned IT complex spanning the Yalu river, hanabiz.com. Beginning with 30 Southern start-ups on a 5,000 sq metre site in Dandong on the Chinese side, by 2002 this will expand across to Sinuiju in North Korea. The partners in the hanabiz venture, who include Herbmedi.com, Gigalink and Cubic TRC, also plan to set up a trial broadband network at the Pyongyang Information Centre in the capital, and to sell Northern software in the South.
• Yet another enthusiast is a medical data start-up, BIT Computer. Its president, Cho Hyun-jung, lectured in Pyongyang in February to 500 local IT experts, who asked for teaching materials (hitherto translated from Japanese). He also met the electronics minister and the head of Korea Computer Centre (KCC), the North’s leading body in the field. Founded in 1990 at Kim Jong-il’s behest, the 800-strong KCC is strong in language software and has developed a version of Linux. Samsung’s software research centre in Beijing, opened a year ago, is staffed by KCC-trained programmers. Cho Hyun-jung also proposed a North Korean Silicon Valley: a concept already touted by Hyundai for its tourist site at Mount Kumgang.
How many Silicon valleys At this rate North Korea may get more Silicon Valleys than it can handle. This can Pyongyang handle? Southern IT rush North is competitive, not co-ordinated. North Korea is saying yes to all comers, but those who fail to deliver will get short shrift. Dotcoms everywhere are long on hype and short on history; but these young bloods should talk to others who have got burnt. The chaebol (Southern conglomerates) are hardly famous for caution, but after a decade not one is yet in North Korea on any scale, except Hyundai, which currently has severe financial problems of its own.
Or perhaps IT is the long-awaited breakthrough that will finally see inter- Korean business take off, like commerce between China and Taiwan. It has a lot going for it. Kim Jong-il’s enthusiasm is echoed by young Southern entrepreneurs like Yoo Wan-young, whose company IMRI makes monitors in Pyongyang, and who has a joint venture, Unikotech, with pro-North ethnic Koreans in Japan to sell KCC’s software. Depending on the field, start-up investment costs can be relatively low. Like the South, North Korea has schooling for all—or at least did until food shortages led to truancy—and is solid in basic science. Computing is officially claimed to be on the curriculum at all high schools and colleges, and Kim Jong-il recently called for “computer genius education bases” to be set up. Perhaps that is what Ntrack and others are expected to offer.
However, where some in the South see opportunity, others perceive a threat. In April South Korea’s defence ministry launched Infocon, a new
EIU Country Report May 2001 © The Economist Intelligence Unit Limited 2001 42 North Korea
system to counter cyber-warfare. A spokesman was blunt about its target, noting that North Korea has “a large number of experts skilled in electronic and cyber warfare”. The legal position is also a mess, as with much North- South interaction. Nominally South Korea bans sending Pentium or even 486 computers to the North under the Wassenaar Arrangement, which controls strategic exports to communist states, while its own firms are making them in Pyongyang. The cunning course is surely to encourage business and upgrade the North’s information-technology infrastructure, in order to promote demand there for Internet access (so far limited) and all that entails politically.
EIU Country Report May 2001 © The Economist Intelligence Unit Limited 2001