COUNTRY REPORT
South Korea North Korea South Korea at a glance: 2002-03
OVERVIEW Both the ruling Millennium Democratic Party (MDP) and the main opposition party, the Grand National Party (GNP), are suffering internal strains as candidates jostle to win their party’s respective nomination to fight the presidential election that is due in December 2002. Real GDP will grow by 3.1% in 2002 and by 3.9% in 2003. The inflationary environment will remain benign, partly reflecting falling oil prices and won appreciation against the US dollar. Current-account surpluses of US$6bn-7bn will be recorded in 2002-03. Key changes from last month Political outlook • Park Geun-hye may challenge the leader of the GNP, Lee Hoi-chang, for the party's nomination to fight the end-2002 presidential election. Economic policy outlook • The government plans to front-load much of the spending allocated for infrastructure projects in the 2002 budget into the first half of the year. Economic forecast • Reflecting stronger-than-expected economic activity towards the end of 2001 the Economist Intelligence Unit has revised upwards our real GDP forecast for 2002 to 3.1% from 1.3% previously.
February 2002
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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 2002-03 10 Political outlook 11 Economic policy outlook 12 Economic forecast 16 The political scene 18 Economic policy 19 The domestic economy 19 Output and demand 22 Employment, wages and prices 24 Financial indicators 26 Sectoral trends 28 Foreign trade and payments
North Korea
32 Political structure 33 Economic structure 33 Annual indicators 34 Outlook for 2002-03 34 Political outlook 35 Economic policy outlook 36 The political scene 37 The domestic economy
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List of tables
12 Forecast summary 13 International assumptions summary 14 Gross domestic product by expenditure 15 South Korea: current-account balance 20 South Korea: expenditure on gross domestic product 21 South Korea: gross domestic product by industry 21 South Korea: manufacturing production, shipments and inventories, 2001 22 South Korea: construction indicators, 2001 23 South Korea: employment, 2001 23 South Korea: wages, 2001 24 South Korea: price indicators, 2001 24 South Korea: money supply, 2001 25 South Korea: financial market indicators 29 South Korea: exports of selected commodities, Jan-Nov 30 South Korea: imports of selected commodities, Jan-Nov 30 South Korea: current- and capital account balances, Jan-Nov 31 South Korea: external liabilities, 2001 39 North Korea: merchandise trade, Jan-Jun
List of figures
16 Gross domestic product 16 Won real exchange rates 22 South Korea: housing prices, all cities 22 South Korea: employment by selected sector, 2001 23 South Korea: employment by selected sector, 2001
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Summary
February 2002
Inter-Korean relations Official inter-Korean dialogue should resume in 2002, although the North may wait until a new president takes office in the South before making any major commitment. Although official inter-Korean communication has been sporadic, unofficial contacts have been continuing.
South Korea
Outlook for 2002-03 Both the ruling Millennium Democratic Party (MDP) and the main opposition party, the Grand National Party (GNP), are suffering internal strains as candidates jostle to win their party’s respective nomination to fight the presidential election that is due in December 2002. Real GDP will grow by 3.1% in 2002 and by 3.9% in 2003. The inflationary environment will remain benign, partly reflecting falling oil prices and won appreciation against the US dollar. Current-account surpluses of US$6bn-7bn will be recorded in 2002-03.
The political scene The government has been weakened by a series of alleged financial and other scandals. At least three confidants of the president, Kim Dae-jung, are under suspicion. Kim Dae-jung resigned as leader of his party, the Millennium Democratic Party, in November.
Economic policy At end-2001 parliament passed the budget for 2002, which is worth W112trn (US$88bn). The government plans to front-load much of the planned spending in the first half of 2002. The Bank of Korea (BOK, the central bank) has maintained its benchmark interest rate, the overnight call rate, at 4%. Chaebol (conglomerate) reform has slowed further.
The domestic economy Real GDP growth (seasonally adjusted) accelerated to 1.2% quarter on quarter in the third quarter of 2001, from 0.4% in the previous quarter. Private consumption, government consumption and gross fixed investment all helped drive growth during the third quarter. Manufacturing production rose by 4.8% year on year in November. Unemployment rose to 3.4% in December, from 3.2% in November. Consumer price inflation, meanwhile, moderated to 3.2% year on year in December, from 3.4% in November and 3.6% in October. The government spent an additional W2.3trn on financial sector restructuring in November, taking the total spent since the end-1997 financial crisis to W152.9trn. South Korean banks made a combined net profit of W5.2trn in 2001, after recording large losses in 1998-2000.
Foreign trade and Preliminary government data show that South Korea recorded a merchandise payments trade surplus of US$9.5bn in 2001, a fall of 19.1% year on year. Export earnings were hit in December by strikes at Hyundai Motors and Daewoo Motor. Government estimates show that China became South Korea’s second most important export market in 2001, accounting for 12.1% of total export revenue. In January-November 2001 the current-account surplus fell by 14.3% year on year, to US$8.7bn.
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North Korea
Outlook for 2002-03 The balance of power in North Korea is shifting more towards military hardliners and away from reformers. Domestic politics will be overshadowed by international issues, particularly the North’s deteriorating relations with the US.
The political scene No visible developments disturbed the surface tranquillity of North Korean domestic politics in late 2001. The North’s leader, Kim Jong-il, visited military establishments 39 times compared with 21 in 2000. In November North Korea signed two anti-terrorism treaties and in December appeared ready to endorse another five. Relations with Japan deteriorated markedly towards end-2001.
Economic policy and the According to the Southern Korea Trade-Investment Promotion Agency (Kotra), economy in the first half of 2001 the value of North Korea’s total trade rose by nearly 80% year on year, to US$1.5bn, although almost all of this was accounted for by the sharp rise in the import bill during the period. After Japan and China, South Korea was the North’s largest trading partner.
Editors: Robert Ward (editor); Graham Richardson (consulting editor) Editorial closing date January 24th 2002 All queries: Tel: (44.20) 7830 1007 E-mail: [email protected] Next report: Full schedule on www.eiu.com/schedule
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Inter-Korean relations
Talks are likely to resume Official inter-Korean dialogue, in abeyance for much of 2001, looks likely to in 2002 resume in 2002. South Korea’s lifting in December of its post-September 11th security alert status removes the North’s pretext for refusing to come to Seoul. Moreover, with the South’s president, Kim Dae-jung, now in his final year of office, North Korea would be wise to deal now, rather than await a successor who is likely to be less generous. The North might also prefer to wait until after the next South Korean presidential election, which is due at end-2002, before making any major commitment. A hard-line Northern government new year editorial, which appeared in the local media, suggests that, as so often, North Korea may respond to uncertainty—in this case, over the direction of the US war on terrorism—by reverting to bluster rather than engagement. Hence, even if the Koreas do talk, they may make little progress on the many substantive issues, such as reconnecting cross-border road and rail links or family reunions; let alone the as yet unbroached security agenda.
North Korea ruptures The fourth quarter brought a frustrating year to a dismal close. The quarter began dialogue hopefully, with a roster of substantive meetings scheduled for October, as agreed at the fifth ministerial talks held in September after a six-month hiatus. However, on October 12th North Korea postponed the fourth set of family reunions, which were due on October 16th-18th, citing safety concerns in South Korea, which (like most of the world) was on heightened security alert status after the September 11th terrorist attacks on the US. It also insisted that future government-level talks be held in the North’s Mt Kumgang resort, rather than alternating between Seoul and Pyongyang as hitherto. After at first resisting this flimsy pretext, South Korea agreed to the change of venue. The sixth round of talks began at Mt Kumgang in the North on November 9th, but made no headway even when extended by two days. They broke up on November 14th with no agreement or joint statement: the first time this had occurred since the June 2000 inter-Korean summit. North Korea blamed the South’s new unification minister, Hong Soon-young, for obstructing progress. Conversely, and unusually, South Korea’s opposition Grand National Party praised him for not caving in to Northern demands. At all events, the dozen or so other planned arenas of substantive contacts—family reunions, cross-border links, economic talks, fisheries co-operation and more—remained in limbo.
2002 will see wan sunshine, Although Kim Dae-jung was reportedly displeased at the talks’ failure, in a at best presidential election year he cannot ignore the public backlash against what is seen as appeasement of an ingrate and recidivist North. So despite vowing in a new year address to stick with his “sunshine” policy in his final year of office, he will hardly risk any major initiatives unless there are real signs of reciprocity from the North.
Private and business Although on-off inter-Korean dialogue is nothing new, an important difference contacts continue now is that unofficial contacts continue even when the two governments are not talking. Southern non-governmental organisations (NGOs), mainly
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religious, are active aid donors, giving W73bn (US$57m at an exchange rate of W1,291:US$1) in total in January-November 2001; during this period 366 Southern civilians also visited the North. This compares to US$245m in outside aid to North Korea in the same period: US$212m from UN relief agencies, US$11.5m in bilateral aid, and US$21.4m from international NGOs. Business ties too continue, but are hardly brisk. Total inter-Korean trade for 2001 looks to be lower than the US$425m notched up in 2000. Despite a few bright spots, like information-technology (IT) joint ventures by small Southern firms, most chaebol (conglomerates) are scaling back any plans they had to invest in North Korea: it is simply too much hassle, for too little—if any— profit. Low-level processing on commission (POC), where Southern firms send materials to be made up in the North, should benefit from Kookyang Shipping’s plan to invest a modest W6.2bn (US$5m at an exchange rate of W1,268:US$1) to modernise cargo handling at Pyongyang’s port of Nampo in the hope of halving the present turnaround time of three days.
Hyundai’s cruise tours may One sad symbol of the current state of inter-Korean ties is that the cruise tours go under to Mt Kumgang that are run by Southern chaebol Hyundai have been drastically curtailed and may soon close down completely. In its day this venture was the vanguard of the “sunshine policy”, attracting over 400,000 tourists in its first three years. The novelty wore off, however. Hyundai’s founder Chung Ju-yung died, the Hyundai group experienced financial difficulties, and above all the sums never added up—witness Chung Ju-yung’s agreement to pay the North almost US$1bn over six years in licence fees alone for the project. North Korea has tolerated late payment, but has not eased terms or done anything to help Hyundai. The South too has lost interest, despite making its official tourist agency, the Korea National Tourist Organisation (KNTO), a partner to keep the project afloat. January brought rumours of further government aid, but this would be politically risky. Historically, these tours have now fulfilled their breakthrough role. Their lesson is that future projects must be based on real mutual benefit, not one-way largesse.
A Northern nuclear team One hopeful sign, as the year ended, was a fortnight-long visit to South Korea by comes South a 20-strong nuclear team from the North, under the auspices of the Korean Peninsula Energy Development Organisation (KEDO), the consortium building new light-water reactors in North Korea. Northern sensitivities meant that reporting was curtailed, but the group visited power stations, training centres, and factories. A further 290 Northern engineers are due to come South for training in the latter half of 2002.
The South-North economic In December South Korea’s National Statistical Office published its latest set of gap grows ever wider comparative economic indicators, showing the ever-widening chasm between the two Koreas. As of 2000 Southern income per head of US$9,628 was nearly 13 times the North’s US$757. For aggregate national income the ratio was 27:1, the South’s US$455bn dwarfing the North’s US$17bn. In two-way merchandise trade, the gulf between the South’s US$333bn and the North’s US$2bn is almost 140:1; for exports it rises to 244:1.
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South Korea
Political structure
Official name Republic of Korea
Form of state Presidential system; the president and the 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, the 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); the next elections are due by December 2002 (presidential) and April 2004 (National Assembly)
National government Minority government of the Millennium Democratic Party (MDP), led by the president, Kim Dae-jung, supported by the Democratic People’s Party (DPP) and independents. The United Liberal Democrats (ULD) left the government in September 2001. The opposition Grand National Party (GNP) remains the largest party, but under the constitution is not empowered to form a government. The GNP has 135 National Assembly seats, the MDP 118, the ULD 15, and the DPP two; there are two independents and one seat is vacant
Main political organisations Government: MDP, DPP. Opposition: GNP, ULD
Main members of State Council President Kim Dae-jung (MDP) Prime minister Lee Han-dong (ex-ULD) Deputy prime minister (finance & economy) Jin Nyum (unaffiliated) Deputy prime minister (education) Han Wan-sang (unaffiliated)
Key ministers Commerce, industry & energy Chang Che-shik (MDP) Construction & transportation Lim In-taik (unaffiliated) Defence Kim Dong-shin (unaffiliated) Environment Kim Myung-ja (unaffiliated) Foreign affairs & trade Han Seung-soo (DPP) Government administration & home affairs Lee Keun-sik (MDP) Health & welfare Kim Won-gil (unaffiliated) Information & communications Yang Seung-taik (MDP) Justice Choi Kyung-won (unaffiliated) Labour Yoo Yong-tae (MDP) Planning & budget Jeon Yun-churl (unaffiliated) Science & technology Kim Young-hwan (MDP) Unification Hong Soon-young (unaffiliated)
Central bank governor Chon Chol-hwan
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Economic structure
Annual indicators
1997 1998 1999 2000 2001a GDP at market prices (W trn) 453.5 444.7 482.3 516.3 544.3 GDP (US$ bn) 476.7 317.3 405.7 456.5 421.8 Real GDP growth (%) 5.0 –6.5 10.9 8.6 2.3 Consumer price inflation (av; %) 4.4 7.5 0.8 2.3 4.3b Population (m) 46.0 46.4 46.9 47.3 47.7 Exports of goods fob (US$ bn)c 138.6 132.1 145.2 175.8 154.8 Imports of goods fob (US$ bn)c 141.8 90.5 116.8 159.2 139.5 Current-account balance (US$ bn) –8.2 40.4 24.5 11.0 10.1 Foreign-exchange reserves excl gold (US$ bn) 20.4 52.0 74.0 96.1 102.8b Total external debt (US$ bn) 145.6 141.3 125.8 123.9a 114.8 Debt-service ratio, paid (%) 8.9 13.2 24.7a 8.3 a 10.2 Exchange rate (av) W:US$ 951.3 1,401.4 1,188.8 1,131.0 1,290.5b
January 22nd 2002 W1,331.5:US$1
Origins of gross domestic product 2000 % of total Components of gross domestic product 2000 % of total Manufacturing 31.5 Private consumption 57.3 Financial & business services 19.1 Government consumption 10.2 Trade, restaurants & hotels 12.0 Gross fixed capital formation 28.7 Construction 8.2 Change in stocks 0.0 Government services 7.5 Exports of goods & services 45.0 Transport, storage & communications 6.5 Imports of goods & services –42.2 Agriculture, forestry & fishing 4.6 Statistical discrepancy 1.1 Electricity, gas & water 2.8 GDP at market prices 100.0 Mining & quarrying 0.3 GDP at market prices incl others 100.0
Main exports 2000d US$ m Main imports 2000d 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 EIU estimates. b Actual. c Balance-of-payments basis. d Customs basis.
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Quarterly indicators
2000 2001 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr Consolidated central government finance (W bn) Revenue 34,844 35,872 33,846 29,022 42,965 32,430 30,884 n/a Expenditure and net lending 29,155 28,349 29,867 40,636 30,702 31,660 33,487 n/a Balance 5,689 7,523 3,979 –11,614 12,263 770 –2,603 n/a Output GDP at constant 1995 prices (seasonally adjusted; W m) 116,378 118,203 120,996 120,483 120,831 121,372 122,887 n/a % change, year on year 11.1 9.4 9.1 5.2 3.8 2.7 1.6 n/a Industrial production index (seasonally adjusted; 1995=100) 148.7 151.3 160.6 155.4 156.3 153.9 156.3 n/a % change, year on year 23.9 18.7 19.5 8.8 5.1 1.7 –2.7 n/a Employment, wages and prices Employment ('000) 20,313 21,268 21,395 21,265 20,403 21,677 21,694 21,673 % change, year on year 6.3 4.5 3.4 1.4 0.4 1.9 1.4 1.9 Unemployment rate (% of the labour force) 5.1 3.8 3.6 3.7 4.8 3.5 3.3 3.2 Average monthly wages, industry (W’000) 1,647 1,665 1,782 1,813 1,787 1,743 5,596 n/a % change, year on year 9.2 8.8 9.1 6.5 8.6 4.7 4.6 n/a Consumer prices (1995=100) 120.1 120.2 122.3 123.2 125.2 126.6 127.5 127.4 % change, year on year 1.5 1.4 3.2 2.9 4.2 5.3 4.3 3.4 Producer prices (1995=100) 119.5 119.4 120.4 121.4 122.5 123.1 122.8 121.4 % change, year on year 2.2 1.9 2.6 1.6 2.5 3.2 2.0 0.0 Financial indicators Exchange rate W:US$ (av) 1,125 1,116 1,115 1,167 1,272 1,305 1,294 1,291 W:US$ (end-period) 1,106 1,115 1,115 1,265 1,328 1,298 1,310 1,314 Interest rates (av; %) Deposit 8.3 8.1 7.9 7.5 6.6 6.1 5.6 n/a Lending 8.7 8.6 8.4 8.5 8.4 8.0 7.5 n/a Money market 5.0 5.1 5.2 5.4 5.1 5.0 4.6 4.1 M1 (end-period; W bn) 35,195 40,428 38,588 46,997 41,997 46,733 54,092 53,696 % change, year on year 7.5 17.8 4.9 5.9 19.3 15.6 40.2 14.3 M2 (end-period; W bn) 350,646 379,872 392,835 413,049 413,528 434,895 457,839 466,786 % change, year on year 26.0 37.7 28.3 25.4 17.9 14.5 16.5 13.0 Stockmarket index (KOSPI; end-period; Jan 4th 1980=100) 860.9 821.2 613.2 504.6 523.2 595.1 479.7 693.7 % change, year on year 39.1 –7.0 –26.7 –50.9 –39.2 –27.5 –21.8 37.5 Foreign trade (US$ m) Exports fob 39,268 43,410 44,376 45,214 40,102 38,369 35,632 36,550 Imports cif –38,831 –39,805 –40,405 –41,440 –38,065 –34,497 –34,154 –34,400 Trade balance 438 3,604 3,972 3,774 2,037 3,872 1,478 2,149 Balance of payments (US$ m) Merchandise trade balance fob-fob 2,552 4,593 5,444 4,284 3,460 5,100 3,095 n/a Services balance –943 –816 –1,085 –881 –551 –783 –1,609 n/a Income balance –459 –1,229 –460 –273 46 –539 –92 n/a Net transfer payments 281 175 119 106 114 –100 –330 n/a Current-account balance 1,431 2,723 4,018 3,236 3,069 3,678 1,064 n/a Reserves excl gold (end-period) 83,581 90,112 92,467 96,131 94,380 94,188 100,016 102,753 Sources: Bank of Korea, Monthly Statistical Bulletin; IMF, International Financial Statistics..
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Outlook for 2002-03
Political outlook
Domestic politics The coming year will be dominated by two sets of elections. Local polls are scheduled for June 2002. (These clash with the football World Cup, so the opposition Grand National Party (GNP) wants them in May, but the ruling Millennium Democratic Party (MDP), hoping for a feelgood factor, does not.) In themselves these elections count for little, as local authorities have few powers, but this year they are seen as a vital pointer to the presidential election in December. This will elect Kim Dae-jung’s successor as president (he cannot stand again). The next president’s term will run from early 2003 until 2008—unless, as is possible but unlikely, the constitution is changed to allow two four-year terms in future.
As Kim Dae-jung’s national popularity ratings are down to around 30%, the GNP, already only two seats short of controlling parliament, should sweep back to power. However, as usual in a South Korean election year, party politics are in flux, and as a result realignments in the coming months are likely. The MDP is divided by the rivalry between a handful of contenders for the nomination. One will be crowned at a party congress in April, after a month of US-style primaries within and beyond party ranks. The likely victor for the MDP nomination is Rhee In-je, who won the 1997 election for Kim Dae-jung by splitting the GNP vote: he ran as an independent, having lost the nomination of the GNP’s previous incarnation, the New Korea Party (NKP), to Lee Hoi-chang. Since the MDP has little real rationale for existence except as a support vehicle for Kim Dae-jung, one or more disgruntled losers could also leave the party and run on an independent ticket after the April party congress.
The GNP too is showing increasing strain between its old guard and young reformers. Its leader, Lee Hoi-chang, came late to politics and so has no firm base in either camp. He is also scorned by two key national political figures: Kim Jong-pil, a veteran maverick ex-premier who leads the small opposition United Liberal Democrats (ULD), and the former president and NKP party leader, Kim Young-sam, who may form a new right-wing party in alliance with Kim Jong-pil. Lee Hoi-chang is now also challenged from within by Park Geun-hye: the daughter of ex-president Park Chung-hee (1961-79), who with hindsight is viewed by many South Koreans less as a dictator than as the Bismarck who built today’s strong South Korea.
Park Geun-hye’s appeal is twofold: her relative youth—she turns 50 in February—and gender hint at change, yet her background reassures traditionalists. Although she is unlikely to unseat Lee Hoi-chang, this mix could make her a strong candidate for some new third force. Kim Jong-pil, who was her father’s right-hand man, may resume his role as king- (or queen-) maker. Another possible scenario, a regrouping of the younger reform elements from both the MDP and GNP, might also deem her a wise pragmatic choice as standard-bearer; even though she is suspect to many progressives. Political uncertainty will be rife, until the dust settles and a new set of party battle lines emerge—probably by April, to allow time for local campaigning.
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International relations Despite the domestic distractions of an election year, foreign affairs will loom large in 2002. South Korea’s main concern will be to dissuade the US from considering North Korea as a potential target in its global war on terrorism. Although Iraq is top priority for those in the US administration that wish to widen the fight, the new risk of biological weapons as a threat adds yet another issue to the already long list of concerns about North Korea. Japan too may take a tougher line, as in December when it sank a suspected North Korean spy ship. As North Korea has been reacting with typical pugnacity to all of this, Kim Dae-jung’s pleas for support for his “sunshine policy” may cut little ice with friends and foes alike. The aftermath of September 11th last year recasts, but does not replace, other bilateral issues. Trade conflicts may recur with the US; although the risk will be less if two major mergers and acquisitions involving US companies—General Motors’ purchase of the ailing Daewoo Motor and a tie-up between Micron and South Korea’s second-largest chipmaker, Hynix Semiconductor—can be completed soon. In the case of Japan, relations that have been soured—by the textbook row and the official visit of the prime minister, Junichiro Koizumi to the controversial Yasukuni shrine in 2001—will be tested when the two countries co-host the football World Cup, a logistical and security nightmare, in May and June. The challenge of China, especially as an economic competitor, will increasingly obsess South Korean policy-makers and firms alike. Russia will remain the Cinderella of the four powers involved in Korea (China, Japan, the US and Russia)—unless North Korea lets the demilitarised zone (DMZ, the strip of land separating North and South Korea) be breached in order to fulfil the dream of Kim Dae-jung and the Russian president, Vladimir Putin, for an “iron silk road”: a railway from South Korea across Russia to Europe. EU aspirations to become a fifth power on the peninsula may recede: 2002 does not look propitious for peace-makers. Abroad as at home, the fact that Kim Dae-jung is on the way out will make all South Korea’s partners wary of new initiatives.
Economic policy outlook
Policy trends Although the president, Kim Dae-jung, will remain formally committed to maintaining the economic reform programme, the pace of reform will continue to slacken as his presidency moves into its final phase. 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 “reform fatigue” among the general public, which will make the government 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 unwillingness to reciprocate Southern concessions; Kim Dae-jung may feel compelled to try to maintain voter support for this policy by further slowing or abandoning economic reform. Victory for the GNP’s leader, Lee Hoi-chang, in the presidential election may well produce an administration more willing to take a softer line on chaebol (conglomerate) restructuring. The Economist Intelligence Unit does not, however, expect a GNP administration to reverse economic reforms undertaken since the 1997 financial crisis.
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Fiscal policy In 2002 and 2003 the government will run relatively modest budget deficits equivalent to 2% and 1% of GDP respectively. This will follow an estimated deficit of 2% of GDP in 2001. Although more rapid economic growth in the latter part of 2002 will help to lift tax revenue, this will be partly offset by continued high levels of public spending as the government attempts to boost domestic demand and to shore up its support base ahead of the end-2002 presidential election. The deepening of the economic recovery and reduced pressure on the public purse from financial sector restructuring should help to narrow the budget deficit further in 2003. The gross public debt stock will remain steady as a percentage of GDP in 2002-03, at around 22.5%; this compares with neighbouring Japan, for example, where the gross public debt stock will top 160% of GDP by end-2003. Overall, South Korea’s public finances are robust, despite a slight deterioration since the end-1997 financial crisis. This should give the government leeway to use further fiscal stimulus if the world economic downturn proves deeper and more prolonged than we are forecasting.
Monetary policy Monetary policy will remain controversial, 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 are willing to take. Given the still delicate state of the financial and corporate sectors—as demonstrated by the liquidity problems reported by key companies in the Hyundai group—we believe that the BOK will have little choice but to maintain a broadly accommodating monetary policy until end-2003. The recent lowering of interest rates in the US, the maintenance of ultra-low interest rates in Japan and the current moderating of inflationary pressures as world oil prices remain soft will give the BOK extra room for manoeuvre should further rate cuts be required in the short term.
Economic forecast
Forecast summary (% unless otherwise indicated) 2000a 2001b 2002c 2003c Real GDP growth 8.6 2.3 3.1 3.9 Gross fixed investment growth 9.8 –2.3 1.6 4.7 Unemployment rate (av) 4.1 3.7 a 3.4 2.9 Consumer price inflation Average 2.3 4.3a 1.4 1.8 Year-end 3.2 2.8a 1.6 2.1 Short-term interbank rate 8.5 7.0 7.4 7.5 Government balance (% of GDP) 0.0 –2.0 –2.0 –1.0 Exports of goods fob (US$ bn) 175.8 154.8 149.0 164.5 Imports of goods fob (US$ bn) 159.2 139.5 138.3 152.7 Current-account balance (US$ bn) 11.0 10.1 6.0 7.1 % of GDP 2.4 2.4 1.3 1.4 External debt (year-end; US$ bn) 123.9b 114.8 116.6 114.4 Exchange rates W:US$ (av) 1,131.0 1,290.5a 1,268.0 1,170.0 W:¥100 (av) 1,049.5 1,059.1 951.5 943.3 W:¤ (av) 1,044.7 1,152.8 1,176.0 1,182.5 W:SDR (av) 1,491.8 1,639.2 1,589.7 1,551.7
a Actual. b EIU estimates. c EIU forecasts.
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International assumptions The outlook for South Korea’s external environment over the short term remains mixed. World trade growth will accelerate modestly in 2002 to 1.1%, from the estimated low of 0.5% in 2001, and rise again to 7.1% in 2003, in line with more rapid growth in the US and the return to growth in Japan. 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 for mainstay products such as cars and semiconductors.
World oil prices (dated Brent Blend) will fall back on average in 2002, as reduced US growth dampens demand for the resource. Oversupply will also weigh on oil prices over the short term, despite OPEC efforts to cut production. Food prices and industrial raw materials prices will rise in both years of the forecast period. Although these rises will put upward pressure on consumer prices—together these items accounted for around 40% of the total import bill in 2000—the impact should be cushioned by the appreciation of the won against the US dollar in the second half of 2001 and in 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.
International assumptions summary (% unless otherwise indicated) 2000 2001 2002 2003 Real GDP growth World 4.7 2.2 2.4 4.2 OECD 3.8 0.9 0.9 3.0 EU 3.3 1.5 1.3 2.5 Exchange rates (av) ¥:US$ 107.8 121.5 128.8 123.5 US$:¤ 0.924 0.896 0.960 1.015 SDR:US$ 0.758 0.785 0.771 0.751 Financial indicators ¥ 2-month private bill rate 0.24 0.18 0.10 0.10 US$ 3-month commercial paper rate 6.32 3.59 1.71 4.88 Commodity prices Oil (Brent; US$/b) 28.5 24.3 18.3 20.2 Total non-oil commodities (% change in US$ terms) 1.7 –4.9 7.4 14.0 Food, feedstuffs & beverages (% change in US$ terms) –6.1 –1.0 11.9 13.4 Industrial raw materials (% change in US$ terms) 13.4 –9.7 1.3 14.8
Note. Regional GDP growth rates weighted using purchasing power parity exchange rates.
Economic growth In the light of a more rapid-than-expected pick-up in domestic economic activity towards end-2001, we have revised upwards our real GDP forecast for 2002, to 3.1%, from 1.3% previously, and expect growth (seasonally adjusted) to accelerate further in 2003, to 3.9%. These rates of growth will, however, be sluggish by the standards of much of the 1990s, and will, particularly in 2002, largely reflect subdued demand for South Korean goods in the two key
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export markets: the US and Japan. More rapid growth in both countries thereafter should help lift export volume growth to nearly 9% in 2003, after contractions in both 2001 and 2002. With firming domestic demand likely to ensure that the contraction in import volumes is less than that of exports in 2002, net trade will act as a drag on overall growth during the year. More rapid export growth thereafter will, however, ensure that the net trade contribution is positive in 2003.
At 4.4%, domestic demand growth will outpace that of overall GDP growth in 2002. This will partly reflect increased the positive impact of increased public spending, as facilities are built or improved ahead of the football World Cup and the Asian Games, both of which will be held in South Korea during the year, and as the government attempts to boost its support base ahead of local and presidential elections, which are also due in 2002. This will help lift private consumption growth and drive a modest recovery in gross fixed investment during the year. From 2003 a more robust export performance will trigger an increase in business investment that should more than offset the expected reduction in public infrastructure spending. Private consumption growth will moderate slightly, as the one-off impact of the special factors in 2002 (including the World Cup) diminishes.
Gross domestic product by expenditure (W bn at constant 1995 prices; % change year on year in brackets unless otherwise indicated) 2000a 2001b 2002c 2003c Private consumption 240,093.4 246,443.6 253,894.3 259,886.1 (7.0) (2.6) (3.0) (2.4) Public consumption 40,825.7 40,825.7 42,254.6 43,099.7 (1.2) (0.0) (3.5) (2.0) Gross fixed investment 131,323.2 128,302.8 130,355.6 136,482.3 (9.8) (–2.3) (1.6) (4.7) Final domestic demand 412,242.3 415,572.0 426,504.5 439,468.1 (7.3) (0.8) (2.6) (3.0) Stockbuilding –10,291.5 –4,998.0 2,000.0 2,000.0 (–0.9)d (1.1)d (1.4)d (0.0)d Total domestic demand 401,950.8 410,574.0 428,504.5 441,468.1 (6.4) (2.1) (4.4) (3.0) Exports of goods & services 245,655.9 241,908.1 233,233.5 254,039.5 (20.5) (–1.5) (–3.6) (8.9) Imports of goods & services –169,480.7 –161,524.9 –158,932.7 –172,992.8 (19.6) (–4.7) (–1.6) (8.8) Foreign balance 76,175.2 80,383.2 74,300.8 81,046.7 (3.2)d (0.9)d (–1.2)d (1.3)d Statistical discrepancy –2,066.6 –4,172.3 –800.0 –800.0 GDPd 476,059.4 486,784.9 502,005.3 521,714.8 (8.6) (2.3) (3.1) (3.9)
a Actual. b EIU estimates. c EIU forecasts. d Contribution to real GDP growth.
Inflation South Korea will enjoy a benign inflationary environment by pre-crisis standards. We expect consumer price inflation to slow sharply from an estimated 4.3% in 2001 to 1.4% in 2002, before picking up modestly to 1.8% in 2003. (The more rapid rate of 2001 was almost entirely the result of one-off factors such as sharp increases in prices for food, medical care services and fuel, which boosted
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year-on-year inflation rates in the first half of the year.) Reasons for the benign inflation performance in 2002-03 include the deflationary impact of continuing corporate and financial sector restructuring; further deregulation of—and entry by foreign companies into—hitherto closed sectors of the economy, particularly in the services sector; the won’s appreciation against the US dollar; and falling oil prices (in 2002), which will help to mute external cost-push pressures; and the likelihood that real GDP growth will remain below our estimate of South Korea’s trend rate of growth of 5% during the period.
Exchange rates In light of the yen’s recent weakness against the US dollar, which has also resulted in a weakening of the won against the US currency, we have revised downwards our won:US dollar forecasts; we now expect the won to average W1,268:US$1 in 2002 and W1,170:US$1 in 2003. The currency’s upward trajectory against the US dollar over the period will be buoyed by a continued favourable merchandise trade position and net capital inflows. A healthy reserves position will also underpin won stability. In real effective terms, the won will appreciate modestly in 2001-03, but will nevertheless remain around 30% weaker than it was in the years immediately before the end-1997 financial crisis. The won will, however, remain vulnerable to the movements of the yen against the US dollar, particularly since South Korean and Japanese exports compete directly in third markets.
South Korea: current-account balance (US$ m unless otherwise indicated) 2000 2001 2002 2003 Goods: exports fob 175,782 154,758 148,993 164,539 Goods: imports fob –159,181 –139,535 –138,253 –152,687 Trade balance 16,601 15,223 10,740 11,852 Services: credit 29,700 28,005 27,683 30,113 Services: debit –33,674 –31,281 –29,817 –31,349 Services balance –3,974 –3,276 –2,134 –1,236 Income: credit 6,842 7,724 5,406 5,655 Income: debit –9,042 –8,852 –7,264 –8,299 Income balance –2,200 –1,128 –1,857 –2,644 Current transfers: credit 6,411 5,923 6,257 7,174 Current transfers: debit –5,794 –6,619 –6,992 –8,017 Current transfers balance 617 –695 –735 –842 Current-account balance 11,044 10,124 6,014 7,130 % of GDP 2.4 2.4 1.3 1.4
a Actual. b EIU estimates. c EIU forecasts.
External sector South Korea will record current-account surpluses of US$6-7bn (just over 1% of GDP) in 2002-03. Driving the surpluses will be continued large merchandise trade surpluses (fob-fob) of US$10bn-11bn during the period. The invisibles balance, meanwhile, will stay in deficit in 2002-03. The services deficit will remain steady at around US$1-2bn in the same period. This will be an improvement over the nearly US$4bn recorded in 2000 and, in the early part of the period, will partly reflect weak import growth, which will moderate increases in import-related services. The income deficit will widen steadily over
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the forecast period, reaching US$2.6bn in 2003. This will owe much to poor returns (by recent standards) on extensive South Korean holdings of US and other foreign assets as a result of subdued world economic growth.
The political scene
The government is beset by The main feature of the political scene over recent months has been a crop sleaze of alleged financial and other scandals. These various “-gates”, as they are called in the South Korean media (after Watergate), although by no means on the scale of past sleaze in the country, add to the dismay at the lack of political reform. In an eerie rerun of Kim Young-sam’s final year in office in 1997, allegations now extend to the president’s inner circle and family. The son (Kim Hong-il, an MP) of the president, Kim Dae-jung, left in January this year for the US, ostensibly for medical treatment, but the GNP says that this is to evade any further probing of his alleged links with gangsters and receipt (in 1988) of monies from the now fugitive head of the bankrupt chaebol (conglomerate), Daewoo, Kim Woo-choong.
Three confidants of the At least three confidants of Kim Dae-jung are under suspicion: Shin Kwang-ok, president are implicated the deputy justice minister until December 14th last year, has been arrested for taking bribes; Kim Sung-nam, who was due to head a presidential anti- corruption commission, withdrew on January 7th after admitting links to Yoon Tae-shik, a businessman accused of murder; two days later the government’s chief spokesman, Park Joon-young, resigned on health grounds, amid press reports that he too is connected to Yoon. These heads are unlikely to be the last to roll.
While “Chingate” spreads, Space prevents a full account of matters that are in any case sub judice: not a “Yonghogate” is reopened concept much heeded in Seoul. The first to emerge, was Lee Yong-ho, a corporate raider accused of fraud and price-rigging, said to have been shielded by a web of bribes involving police, prosecutors, and tax and intelligence officials (see November 2001, page 18). In December a bid by
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the opposition Grand National Party (GNP) to impeach the prosecutor- general, Shin Seung-nam, who has admitted that his brother received money from Lee Yong-ho, failed when a smaller opposition party, the United Liberal Democrats (ULD) withdrew support. Lee Yong-ho’s case has, however, been reopened by an independent counsel, only the third ever appointed in South Korea.
Another businessman convicted of fraud and stock price manipulation is Chin Seung-hyun. It is he who allegedly suborned vice-minister Shin Kwang-ok via a then senior presidential secretary, Choi Taek-gon. Chin Seung-hyun is said to have a list implicating other top MDP (Millennium Democratic Party) figures.
“Yoongate”: the NIS The latest case to emerge is the most bizarre and damaging. The National apologises Intelligence Service (NIS), the successor to the dreaded Korean Central Intelligence Agency (KCIA), has admitted shielding a murderer since 1987. After a Korean woman, Suzy Kim, was killed in Hong Kong in 1987, her husband Yoon Tae-shik (noted in the Kim Sung-nam case) fled to Singapore, where he sought asylum at the North Korean embassy. Rejected, he then claimed that his wife’s killers were Northern agents. Although Yoon soon confessed, the agency suppressed this and used his story for anti-Pyongyang propaganda.
Separately, Yoon Tae-shik was later jailed for fraud. Yet in 1998 he set up Pass21, a successful information-technology (IT) business specialising in fingerprint authentication, allegedly with NIS backing, and with an ex-finance minister as its chairman. Yoon Tae-shik has now been charged with murder, just before the statute of limitations was due to expire, and senior ex-NIS and police officials are accused of blocking earlier attempts to investigate the case. An ever-widening circle, including politicians and media figures, turn out to have been given Pass21 shares. The NIS has publicly apologised for this and other crimes, including the recent confirmation that Tsche Chong-kil, a dissident professor who supposedly jumped to his death from KCIA headquarters in 1973, was in fact tortured and murdered as had long been suspected.
There may be worse to In an election year such matters have special salience. For the circle of Kim come Dae-jung, a Nobel peace prize winner, to be targeted must tarnish his image, and he is blamed for failing to reform bodies like the NIS. Disinterring old cases like that of Tsche Chong-kil is seen as a counter-attack, as the KCIA’s worst offences were under military regimes to which the GNP is in part the political successor. None of this puts South Korea’s political class or state institutions in a good light—and there may be worse to come, if Kim Woo-choong, whose alleged untraceability is as unconvincing as that of Tommy Suharto in Indonesia, names recipients of the vast slush-funds that he wielded right up to the US$80bn collapse of his company, Daewoo, in 1999.
The MDP leadership is Scandals apart, the main political news of recent months was Kim Dae- shaken up jung’s resignation as president of the MDP on November 8th, after its loss of three seats to the GNP in October by-elections, and the resignation thereafter en masse of the party’s ruling council. Although this ostensibly places Kim Dae-jung above the fray of choosing his successor and allowing him to appoint non-MDP ministers in a cabinet reshuffle expected soon,
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this is seen by some as a wily way to widen his freedom of manoeuvre and try to avoid becoming a lame duck in his final year.
Kim Dae-jung visits Europe As ever of late, Kim Dae-jung found a warmer welcome globally than locally. Besides his usual attendance at the autumn’s two big regional meetings, APEC and “ASEAN + 3”, December 2001 saw the president in Europe: visiting the UK, Norway and Hungary, and becoming the first Asian leader ever to address the European Parliament in Strasbourg. Kim Dae-jung is comfortable in Europe, which backs his “sunshine policy”. His call at Strasbourg for South Korea to expand its links beyond the US was later glossed as meaning export diversification, but it had political resonance too.
Economic policy
The 2002 budget is passed At the end of December 2001 the National Assembly (parliament) passed the budget for 2002. (South Korea’s fiscal year runs from January to December.) At W112trn (US$88bn at an exchange rate of W1,268:US$1), the approved budget was some W606bn less than the draft budget that the government approved in September (see November 2001, page 19). In an attempt to stimulate economic growth, the government plans to front-load much of the spending that has been allocated for public works in the budget in the first half of the year. Much of this extra spending is likely to be directed at improving facilities ahead of the football World Cup, which South Korea will co-host with Japan in May and June, and the Asian Games, which will be held in Busan in September and October.
The BOK maintains the The Bank of Korea (BOK, the central bank) maintained its target for its current overnight rate at 4% benchmark interest rate, the overnight call rate, at 4% in late 2001 and early 2002. The reasons for not implementing further rate cuts—between January and September last year the BOK cut the overnight call rate three times— included signs of economic recovery apparent in the latter part of 2001, particularly a rebound in industrial production growth and buoyant consumer demand. Relative financial market stability and the government’s stepping up of fiscal spending in the first half of this year will also have reduced pressure for further monetary easing over the period.
Chaebol reform slows Political pressure on the chaebol to reform continues to ease. Although this further partly reflects the government’s need to lighten restrictions on chaebol activity put in place in the wake of the 1997 financial crisis in order to support the domestic economic recovery, it also reflects more direct political concerns: with the next presidential election now less than a year away, the government badly needs to secure funds from the chaebol in order to finance its election campaign; historically the chaebol have been South Korea’s most important providers of political funds.
An important example of the increasingly softening approach to corporate reform includes the decision taken in October 2001 to allow the chaebol to own up to 10% of local banks, up from just 4% previously (see November 2001, page 20). This was then followed in November by the announcement
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by the government of a plan to revise the criteria for designating the so- called top-ranking chaebol. Under the current system, designation as a top- ranked chaebol carries with it a range of restrictions on investments such groups can make in other companies and other business activities. Under the new system, which may be introduced as soon as April this year, only companies with assets of W5trn or more will fall into this category. The move will, in effect, reduce the number of top-ranked chaebol from the 30 currently, to less than 20.
This was followed in December by the government’s dropping of legislation to facilitate class action law suits, so boosting the rights of minority shareholders. The original purpose of the new law was to raise corporate transparency by increasing the accountability of top chaebol management. Given that the reckless investment decisions of certain chaebol in the early and mid-1990s were partly responsible for the country’s 1997 financial crisis, improving management accountability has long been seen as a vital part of corporate reform. The dropping of the legislation will have pleased the chaebol lobby group, the Federation of Korean Industries, which had put heavy pressure on politicians to prevent its adoption.
The KFTC is isolated The increasing politicisation of corporate reform in South Korea has exposed differences between the government and the Ministry of Finance and Economy (MOFE) on one hand and the regulator of competition policy, the Korean Fair Trade Commission (KTFC), on the other. The KTFC was, for example, strongly opposed to the government’s proposed easing of designation criteria for top-ranking chaebol. In part the KFTC’s concerns were turf-related, as it is responsible for designating and monitoring the top chaebol under the current rules. However, the KFTC also expressed concerns that relaxing controls on large chaebol in such a manner would merely increase the economic dominance of such groups, thereby reversing the progress made since the current administration took office in February 1998. The fact that the KFTC was easily overridden on the issue by the government and MOFE also underlined how little weight its voice carries in Seoul’s official circles.
The domestic economy
Output and demand
GDP growth accelerates in Real GDP growth in the third quarter of 2001 (seasonally adjusted) accelerated the third quarter to 1.2% quarter on quarter from 0.4% in the second quarter. This was highest rate of growth since the 2.4% recorded in the third quarter of 2000. In terms of demand, while private consumption slowed and public consumption growth accelerated, the impetus for growth came from a turnaround in gross capital formation, on the back of 6% quarter-on-quarter growth in construction as the government boosted public works spending.
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South Korea: expenditure on gross domestic product (% change, quarter on quarter; constant 1995 prices, seasonally adjusted) 2000 2001 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr Private consumption 1.2 0.3 0.3 –1.0 3.3 0.7 Government consumption 0.3 0.1 0.9 –3.5 1.9 2.7 Gross fixed capital formation –1.2 –0.9 –4.9 2.6 –1.4 1.6 of which: construction 0.7 –1.3 –0.8 2.9 0.1 6.0 machinery & equipment –3.2 –0.5 –9.3 2.3 –3.2 –4.0 Exports of goods & non-factor services 0.4 4.4 –0.7 4.0 –6.2 –2.7 Imports of goods & non-factor services –1.3 6.2 –1.7 –3.0 –8.3 8.4 GDP 1.6 2.4 –0.4 0.3 0.4 1.2 Source: Bank of Korea.
An investment recovery The top 200 conglomerates cut their facility investments by 5.8% in 2001, may be under way because of the global economic downturn and falling memory chip prices, according to the Ministry of Commerce, Industry and Energy (MOCIE). However, signs that a recovery in investment in manufacturing may be under way can be read from the upsurge in imports of goods and services in national accounts terms. This is also supported by data from the National Statistical Office (NSO), which show year-on-year rises of 4.8% and 4.2% in domestic machinery orders (excluding volatile orders from shipbuilders) in September and October respectively, after large falls in previous months.
Consumers gain confidence The consumer-survey index of the Bank of Korea (the central bank) for future spending plans recovered to 111 points in the fourth quarter of 2001, from 107 points in the third quarter. (A result above 100 points implies the majority of those surveyed plan to increase spending in the next six months). Consumer spending on durables was up by 5.9% year on year in the third quarter, and up by 3.8% in the January-October. The resilience of consumer sentiment in the latter part of 2001 was further confirmed by MOCIE data, showing that department store sales rose by 14.3% in November and by 18% in December, both year on year. This brought the full-year growth in department store sales in 2001 to 4.5%.
Export volumes decline The decline in exports of goods and services slowed to 2.7% quarter on again quarter in the third quarter, from 6.7% in the preceding period. Although South Korea’s relatively diversified export base has enabled it to avoid the precipitous contractions in export volumes notched up by countries such as Taiwan and Singapore, which are more dependent on information- technology exports, this was nevertheless a disappointing performance. To a large extent it reflected weak demand during the period for South Korean products from the two of its most important export markets, Japan and the US. Given the above-noted robust import volume growth, the contribution of the foreign sector to GDP in the third quarter was negative.
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Manufacturing growth Supply-side GDP data suggest that manufacturing output may have begun to firms recover in the third quarter, albeit modestly. Growth in the construction sector, meanwhile, was particularly strong during the quarter, at 4.5% quarter on quarter, again partly reflecting government stimulus. This was the fastest rate of expansion for the sector since 1996, although in absolute terms construction remains well below 1998 levels.
South Korea: gross domestic product by industry (% change, quarter on quarter; constant 1995 prices, seasonally adjusted) 2000 2001 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr Agriculture, forestry & fishing –3.5 0.4 1.2 –2.3 5.1 –3.9 Manufacturing 2.8 5.2 –2.7 0.3 –0.7 1.0 Electricity, gas & water –2.0 2.1 4.1 6.7 –6.1 –0.2 Construction 1.7 –1.5 –0.9 3.1 0.1 4.5 Wholesale & retail 1.9 1.8 2.2 –3.3 2.6 1.7 Finance & insurance –1.9 0.0 –1.9 9.3 –2.9 –0.1 Transport, storage & communication 4.1 3.6 3.3 –2.8 2.5 6.2 Source: Bank of Korea.
Semiconductor output is Manufacturing production data published by the NSO paint a relatively rising positive picture of industrial activity towards the end of the year. Not only had the year-on-year falls in seasonally adjusted manufacturing production stopped by September, with production even rising by a robust 4.8% in November, but growth in inventories also slowed sharply, while shipments accelerated. This partly reflected the recovery in the semiconductor sector, where prices and demand for dynamic random-access memory (DRAM) chips started to rise towards the end of the year. (Semiconductor production rose by 6.4% year on year in November, after rises of just over 2% in September and October.) Other sectors that have shown resilience in the downturn include shipbuilding and machinery and equipment.
South Korea: manufacturing production, shipments and inventories, 2001 (% change, year on year; seasonally adjusted) Jun Jul Aug Sep Oct Nov Manufacturing production –3.1 –6.5 –4.9 2.1 0.9 4.8 Manufacturing shipments –0.7 –7.3 –6.9 0.7 2.0 6.8 Manufacturing inventories 15.2 14.6 14.0 10.6 3.2 0.9
Source: National Statistical Office.
The value of civil Non-GDP data confirm the recovery in the construction sector. The value of engineering works rises domestic construction orders rose by 80.5% year on year in November, according to the NSO, continuing the recovery that was established at mid-year. The public sector is playing an important role in this recovery: the cumulative value of orders received for civil engineering work was up by 5.1% year on year in the first ten months of the year. A boom in housing demand has reportedly taken the apartment prices in Seoul above their pre-crisis level, mainly thanks to the low level of interest rates. Prospects for construction in 2002 will be boosted by work associated with the football World Cup and the Asian Games and housing is expected to perform strongly, with the private sector returning to growth.
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South Korea: construction indicators, 2001
Jun Jul Aug Sep Oct Nov Permits for building construction (m sq metres) 9.96 8.51 8.17 8.86 9.22 10.58 % change, year on year 51.0 27.1 7.0 30.6 28.7 58.4 Domestic construction orders received (W trn) 45.29 28.59 25.58 45.20 39.82 60.71 % change, year on year –8.3 11.9 –19.4 63.7 30.2 80.5 Source: Bank of Korea.
Employment, wages and prices
Unemployment remains The unemployment rate remained low in the final months of 2001, at just low above 3%. Employment in manufacturing and agriculture continued to edge downwards on a year-on-year basis, falling by 1.9% and 1.5% in the fourth quarter of the year. In the case of manufacturing, this was a fall exacerbated by the downturn in external demand rather than job-shedding via industrial restructuring, which has largely come to a halt, while the slip in agricultural employment reflected seasonal factors. Absorbing an increasing participation
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rate, which rose from 58.9% in the first quarter of 2001, to 61.5% in November, and a shift out of manufacturing, job creation is proceeding rapidly in the fast-growing services sectors. Employment in the services sector rose by 4% in the fourth quarter, year on year.
South Korea: employment, 2001 (m unless otherwise indicated) Jul Aug Sep Oct Nov Dec Labour force 22.52 22.28 22.48 22.56 22.52 22.11 Employed 21.76 21.52 21.80 21.86 21.81 21.35 of which: manufacturing 4.17 4.09 4.21 4.22 4.25 4.22 Unemployed 0.76 0.75 0.68 0.70 0.71 0.76 Unemployment ratea (%) 3.4 3.4 3.0 3.1 3.2 3.4
a Not seasonally adjusted.
Source: National Statistical Office.
Wage growth remains Two important reasons for the current buoyancy of consumer spending are that generally firm recent tax concessions have allowed disposable incomes to rise rapidly and that the low level of inflation means that those in employment are generally enjoying robust real-wage gains. Reflecting the loosening of the labour market in both sectors, those in manufacturing and construction enjoyed less robust wage growth than their peers in other industries in the latter part of the year. Among the star performers during the period was the retail sector, which saw wages rise by 10.5% and 15.8% year on year in September and October respectively.
South Korea: wages, 2001 (W per month; % change year on year in brackets) May Jun Jul Aug Sep Oct All industries 1,599,600 1,911,213 1,802,909 1,773,371 2,019,533 1,738,254 (5.0) (4.1) (5.6) (1.3) (7.0) (4.8) Manufacturing 1,442,889 1,792,445 1,662,328 1,711,457 1,872,629 1,634,634 (3.6) (6.8) (5.0) (–1.2) (10.2) (2.4) Construction 1,773,956 1,902,909 1,899,054 1,707,233 2,194,700 1,660,591 (0.8) (12.3) (–4.6) (–4.0) (6.7) (–2.1) Source: National Statistical Office.
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Price inflation is slow Consumer prices and producer prices rose on average by 4.3% and by 1.9% respectively in 2001. Won appreciation, subdued domestic demand in the early part of the year and generally low international commodity prices combined to suppress inflation as the year progressed. Monthly rates of consumer price inflation slowed from a year-on-year peak of 5.2% in June to just 3.2% in December, while producer prices fell by 0.7% in December, having peaked at 2.8% in June. The terms of trade strengthened markedly in 2001, with export prices consistently outpacing import prices, reflecting the strength of the won, as well as low commodity prices and the weak yen. The rate of growth of export prices fell progressively in the last months of the year, however, as South Korean exporters fought to maintain market share in the face of renewed weakness.
South Korea: price indicators, 2001 (% change, year on year) Jul Aug Sep Oct Nov Dec Consumer prices 5.0 4.7 3.2 3.6 3.4 3.2 Producer prices 2.7 2.0 1.2 0.6 0.1 –0.7 Export prices (won terms) 7.5 5.8 5.7 5.0 1.1 n/a Import prices (won terms) 7.1 5.5 2.3 –1.2 –6.4 n/a Source: Bank of Korea.
Financial indicators
Monetary aggregates Year-on-year growth of M1, which includes currency in circulation and demand expand rapidly deposits, remained rapid in the final months of 2001. Reasons for this included continued low interest rates, which reduced the attractiveness of time deposits, and injections of liquidity from higher public-sector spending. Growth in the broader aggregates, M2 and M3, although more moderate, was also rapid in year- on-year terms. This reflected both robust lending by banks to the private sector and increased deposit-taking by non-bank financial institutions.
South Korea: money supply, 2001 (W bn unless otherwise indicated; end-period) Jul Aug Sep Oct Nov Dec M1 44,551 44,891 54,092 49,549 48,951 53,696 % change, year on year (15.7) (16.7) (40.2) (15.2) (16.9) (14.3) M2 436,159 440,619 457,839 450,348 459,047 466,786 % change, year on year (12.8) (12.0) (16.5) (12.7) (13.2) (13.0) M3 972,029 983,743 1,004,630 1,005,570 n/a n/a % change, year on year (9.5) (9.7) (12.1) (11.4) (n/a) (n/a) Source: Bank of Korea.
Interest rates are stable The Bank of Korea (the central bank) reduced its target for the overnight call rate in September 2001 to a historical low of 4%, in order to stimulate economic activity, bringing down long-term interest rates down as well. Thereafter, as expectations for economic recovery mounted, yields on treasury and corporate bonds rose moderately, while a more favourable economic outlook raised confidence about the corporate sector and reduced the yield premium of corporate bonds over government paper. Despite the slight rise in long-term rates towards the end of the year, by historical standards yields on
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long-term South Korean corporate and government paper remained low in both nominal and real terms.
The cost of bank A report issued in January 2002 by the Ministry of Finance and Economy restructuring rises again (MOFE) and quoted in the local press revealed that the government spent W2.3trn (US$1.8bn at an exchange rate of W1.291:US$1) on restructuring financial institutions in November 2001. The money was used by the Korea Deposit Insurance Corporation (KDIC) and the Korea Asset Management Corporation (KAMCO) to bail out ailing financial companies and to repay deposits at failed institutions. This brings the total cost of restructuring the financial sector since the end-1997 financial crisis to W152.9trn, or some 30% of GDP. MOFE says in had recovered W38trn of the total as of end-November last year, by selling some of the shares and non-performing loans that it had acquired.
MOFE estimates that the maximum needed from taxpayers to keep financial institutions afloat in 2002 will be W4.9trn. This includes W1.8trn for Korea First Bank (KFB), up to W2.1trn for credit unions and merchant banks and up to W1trn for insurance and securities firms. Currently Newbridge Capital, which is the majority shareholder in KFB, and the KDIC are still trying to agree over the amount of public funds to be put into KFB through the International Council for Commercial Arbitration. When it sold KFB to Newbridge in 1999, the government promised to compensate it for loans that turned bad within two years after the sale.
South Korea: financial market indicators (end-period unless otherwise indicated) 2001 2002 Aug Sep Oct Nov Dec Jana KOSPIb (Jan 4th 1980=100) 545.1 479.7 528.3 643.9 693.7 708.5 Overnight won rate (%) 4.9 4.1 4.1 4.1 4.1 4.1 3-year non-guaranteed corporate bond (%) 6.54 5.96 6.34 6.99 7.04 6.98 W:US$ 1,279.5 1,304.5 1,279.6 1,273.0 1,313.5 1,320.6
a January 18th 2002. b Korea Composite Stock Price Index.
Source: Bloomberg.
Bond financing rises Direct financing by local companies reached W80.7trn in January-November sharply 2001, a 25% year-on-year rise, according to the Financial Supervisory Service (FSS). The poor conditions on the stockmarket for most of the year lay behind the 25% year-on-year fall in equity issues, to W9.3trn, while bond issuance rose by 37.5%, to W71.4trn, on the back of low interest rates and the benign inflationary environment. Issues of corporate bonds with a rating of BBB, the lowest investment grade, more than doubled to W8.4trn in the 11 months. The four largest chaebol—Samsung, Hyundai, LG, and SK—raised W16.4trn from share and bond issues, up by 82% year on year, as they continued to improve their balance sheets; stock issuance by the four during the period rose by 16.3% to W2trn, and bond issuance by 97.3% to W14.4trn.
EIU Country Report February 2002 © The Economist Intelligence Unit Limited 2002 26 South Korea
Domestic banks fare well According to the FSS, South Korea’s 22 domestic banks are estimated to have in 2001 made record combined net profit in 2001 of W5.2trn, despite their exposure to large ailing companies such as Hynix Semiconductor and Hyundai Engineering and Construction. This compares with combined net losses of W4.2trn in 2000, of W5.5trn in 1999 and W20.7trn in 1998 at the height of the economic crisis. Interest income earned from the margin between deposit and loan rates accounted for the largest share of revenue, at W14.6trn, with commission income and trust fund income accounting for W6.4trn and W1.2trn respectively. Kookmin Bank, which merged with Housing and Commercial Bank in November last year, was one of the strongest performers, recording net profit for 2001 of W1.5trn, while Peace Bank was the only bank to record a net loss for the year, of W20.7bn.
Local share prices firm South Korean share prices firmed towards end-2001, with the benchmark Korea Composite Stock Price Index (KOSPI) reaching a recent high of 700 points in January this year, a level not seen since mid-2000. Reasons behind this strong performance included South Korea’s strong economic performance particularly relative to regional peers such as Taiwan and Singapore, and the low interest rates in the US, which persuaded some investors to seek higher returns in relatively “safe” emerging markets such as South Korea.
The won tracks the yen The won slipped against the US dollar in December and January. This was down mainly owing to the yen’s sharp weakening against the US currency during the period, from around ¥120:US$1 at the end of November 2001, to below ¥130:US$1 in early January. Reasons for the yen’s weakness included renewed concerns about the health of the Japanese banking sector, as well as uncertainty over whether the Japanese government was about to adopt a policy of deliberately weakening the yen in order to help exporters and to mute deflationary pressures. As so many South Korean goods compete directly with Japanese goods on third markets, the won tends to track yen movements closely; its recent slide was, therefore, unsurprising. Moreover, enhanced exchange-rate flexibility since the government abandoned its “managed currency float” in the run-up to the end-1997 financial crisis should enable the won to adjust to any further yen volatility relatively smoothly.
Sectoral trends
More M&As are on the cards A general trend that could deepen is mergers and acquisitions (M&A), both cross-border and within South Korea. Internationally, all being well two major acquisitions will at last be completed: the purchase by General Motors (GM) of the US of Daewoo Motor, and the takeover of the chipmaker Hynix Semiconductor by Micron of the US. The latter is a new prospect, so if the usual Seoul timescale obtains, it may be some time yet before the deal comes to fruition, with predictable rows over control and how much of Hynix’s debts Micron will take on. GM’s success in fending off similar pressures with regard to Daewoo Motor suggests that Hynix’s creditors should not be too sanguine.
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AIG pulls out of the A third possible takeover, that of three Hyundai financial units—Hyundai Hyundai deal Investment Trust and Securities, Hyundai Investment Trust Management and Hyundai Securities—by a consortium led by American Insurance Group (AIG), fell through in mid-January this year after AIG pulled out of negotiations citing the government’s refusal to accept AIG’s request that it offer the consortium a guarantee to cover any debts held by the firms that turned bad after its purchase of the three units. The government was, however, relaxed about AIG’s move, saying that it had been approached by several other foreign firms interested in acquiring the Hyundai units.
The GM and Micron deals The Daewoo and Hynix deals will, however, reshape their respective sectors. If could have big implications GM gets Daewoo, two of South Korea’s three remaining car manufacturers will be foreign-owned; the third is foreign-invested. Renault of France has bought Samsung Motor, while US-German vehicle maker DaimlerChrysler has 15% of the market leader Hyundai Motor, now spun off from, and bigger than, the parent Hyundai group. A takeover of Hynix by Micron would produce the world’s largest memory-chip manufacturer, overtaking Samsung Electronics. Importantly, such a deal would also help eliminate some of the excess capacity that has bedevilled the industry in recent years. Although economically it is vital for both deals to be swiftly and smoothly sealed, a presidential election year is not the best time to sell major assets to foreigners.
Banking and telecoms will Two sectors ripe for consolidation, with or without foreign participation, are see consolidation banks and information technology (IT). The former had a good year, turning 2000’s aggregate losses of W4.2trn into net profits of W5.2trn (US$4bn at an exchange rate of W1,291:US$1). W1.5trn of this was made by Kookmin Bank alone, whose November merger with the former Housing and Commercial Bank to create by far the country’s largest bank is spurring competitors to follow suit. Shinhan and Koram, both healthy but much smaller, deny that they are in merger talks, or that they are eyeing SeoulBank, which was nationalised in 1997 and has remained unsold since a planned purchase by HSBC fell through in 1999. Korea First Bank and Hana Bank are also said to be in discussions. Despite the denials, movement towards further M&A in banking is likely in 2002.
Meanwhile, South Korea’s dynamic IT and telecoms sectors too are facing a shake-out. Having become the global leader in broadband thanks to the fierce competition encouraged by the government, which kept prices low, the sector now needs consolidation to recoup investment. Thus in early January this year the second- and third-largest Internet service providers, Hanaro Telecom and Korea Thrunet, who are also discussing a merger, said they will bid jointly for a controlling 30% stake in Powercomm. (Powercomm is a subsidiary of the state- owned electricity monopoly, Korea Electric Power (KEPCO), with 68,000km of fibre-optic cable and 46,000km of cable-television networks and is due to be privatised this year.) However, Powercomm has its own plans: on the same day, it announced a strategic alliance with Dacom, the second largest fixed-line phone provider after KT (formerly known as Korea Telecom).
EIU Country Report February 2002 © The Economist Intelligence Unit Limited 2002 28 South Korea
Foreign trade and payments
The trade surplus falls by Provisional data from the Ministry of Commerce, Industry and Energy (MOCIE) 19% in 2001 show that export earnings (customs basis) fell by 19.6% year on year in the first 20 days of December last year, to US$12bn. The import bill, meanwhile, fell by 14.1% year on year in December, to US$11.3bn. MOCIE also estimates that export earnings for the full year totalled US$150.7bn, a fall of 12.5% year on year, and that the cost of imports for the year stood at US$141.1bn, down by 12.1% on the 2000 level. This gave a merchandise trade surplus (fob-cif) for 2001 of US$9.5bn, which is 19.1% lower than the 2000 figure.
Strikes lowered export The lower-than-expected full-year surplus was attributed to a number of factors earnings in December that dampened exports in December in particular, when export growth is normally brisk as companies strive to meet their annual targets. One factor was the decline of the won, which lost just over 3% of its value against the US dollar between end-November and end-December. Other factors affected the performance of the few export industries that had stood out amid the overall downturn in exports. A strike at Hyundai Motors and interruptions in supplies of parts to Daewoo Motor hit vehicle exports, and failures to meet delivery deadlines dampened exports by the shipbuilding industry; MOCIE claims US$300m in vehicle export earnings was lost owing to the strikes and that US$100m was lost as a result of the shipping delivery problems.
China becomes the second MOCIE has also published preliminary estimates of exports by country for export market 2001. The US remains the most important export market, accounting for 20.8% of total export revenue for the year. Reflecting both China’s increasing economic importance in the region and Japan’s acute economic problems, China overtook Japan in 2001 to become the second most important export destination, accounting for 12.1% of the total, after 10.7% in 2000 and 7.3% in 1995. Japan, meanwhile, accounted for 11.1% of the total in 2001, after 11.9% in 2000 and 13.6% in 1995. According to MOCIE, China was the most important market in 2001 for South Korean exports of petrochemicals, steel plates and electronic tubes and parts.
Electronics exports A detailed breakdown of export revenue by commodity is available from the plummet Bank of Korea (BOK, the central bank) up to November last year. Revenue performance was poor in almost every export category during the period. As might be expected given the downturn in world demand for information- technology products, revenue from electronic products fell by a steep 23.5% year on year during the period, with semiconductors falling by just over 40%. Year-on-year falls in sales abroad of textile-related products were also precipitous during the period, reflecting both increasing competition from cheaper producers in countries such as China. Many South Korean textile producers have also shifted production to cheaper locations abroad, which further acts as a drag on earnings in this category.
Car and ship exports In contrast, earnings from the exports of cars and ships remained robust, perform well rising by 5.3% and by 24.1% respectively year on year during the period.
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Both items compete directly with their Japanese counterparts in overseas markets and were therefore able to benefit from the relative strength of the yen for most of the year. Demand for South Korean cars has been particularly strong of late, reflecting increasing cost consciousness on the part of US consumers against the background of an uncertain economic outlook. According to MOCIE, 99.5% of total shipbuilding orders placed in 2001 were for export. With nearly US$2bn of orders, Germany was the most important export destination for South Korean ships in 2001, followed by Greece with US$1.8bn and Japan with US$420m.
South Korea: exports of selected commodities, Jan-Nov (US$ m unless otherwise indicated) % change 2000 2001 year on year Food 2,533 2,418 –4.5 Crude materials & fuels 10,545 9,398 –10.9 of which: petroleum & derivatives 8,502 7,514 –11.6 Clothing 4,609 3,981 –13.6 Fabric 7,866 6,511 –17.2 Rubber tyres & tubes 1,301 1,301 0.0 Chemicals & chemical products 11,077 10,001 –9.7 Metal goods 10,450 9,250 –11.5 Machinery & equipment 10,857 10,703 –1.4 Electronic products 57,067 43,684 –23.5 of which: semiconductors 19,615 11,389 –41.9 information & communication equipment 25,764 21,975 –14.7 electronic home appliances 6,512 6,213 –4.6 Passenger cars 10,050 10,582 5.3 Ships 7,058 8,759 24.1 Total incl others 157,291 138,617 –11.9 Source: Bank of Korea.
Imports are held back by Of the main import categories the only one to show an increase in January- low investment November last year was food and consumer goods, which rose by 2% year on year. The 8% year-on-year decline in imports of industrial materials and fuels was accentuated by the fall in world prices of its largest component, crude petroleum. Capital goods imports fell even more sharply, by 20%, reflecting the decline in industrial investment. One of the sharpest falls in this category was in the imports of semiconductors, highlighting how closely imports and exports are interrelated—many of the imported semiconductors are used in products for export. Overall the fall in imports for use in exports continued to outstrip the decline in imports for domestic use both in absolute and percentage terms. The former fell by 15.4% year on year in January-November last year against a 9% year-on-year fall in imports for domestic use in the same period.
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South Korea: imports of selected commodities, Jan-Nov (US$ m unless otherwise indicated) % change, 2000 2001 year on year Food & consumer goods 14,722 15,021 2.0 of which: cereals 2,209 2,261 2.4 consumer non-durables 2,353 2,851 21.2 consumer durables 5,914 5,592 –5.4 Industrial materials & fuels 72,299 66,530 –8.0 of which: crude petroleum 23,051 20,050 –13.0 minerals 3,905 3,808 –2.5 light industry inputs 4,455 4,073 –8.6 chemicals & chemical compounds 10,833 10,391 –4.1 iron & steel products 5,615 4,626 –17.6 non-ferrous metals 4,475 3,864 –13.7 Capital goods 60,284 48,241 –20.0 of which: machinery & equipment 16,984 14,012 –17.5 electric & electronic machinery 39,829 31,141 –21.8 of which: semiconductors 18,054 14,280 –20.9 information & communication equipment 11,456 8,382 –26.8 transport equipment 2,624 2,364 –9.9 Total 147,305 129,792 –11.9 For domestic use 80,818 73,570 –9.0 For export 66,487 56,223 –15.4 Source: Bank of Korea.
The current-account The current-account surplus fell in January-November 2001 by 14.3% year on surplus is down year, to US$8.7bn. Despite falling trade volumes, which drove the 12.6% year- on-year decline in the merchandise trade surplus (balance of payments terms), the deficit on the services account widened, mainly as a result of a worsening of the travel account as the number of foreigners visitors to the country decreased. The current transfers account moved from surplus to deficit over the period, reflecting lower remitted earnings by South Koreans working overseas. These unfavourable developments were offset by a sharp narrowing of the deficit on the income account, attributable to increased earnings from foreign-currency assets and lower interest payments on the country’s dwindling foreign debt.
South Korea: current- and capital account balances, Jan-Nov (US$ m unless otherwise indicated) % change, 2000 2001 year on year Merchandise exports fob 161,135 139,749 –13.3 Merchandise imports fob 146,089 126,597 –13.3 Trade balance 15,046 13,152 –12.6 Services balance –3,333 –3,562 6.9 Income balance –2,303 –423 –81.6 Current transfers 681 –517 –175.8 Current-account balance 10,091 8,651 –14.3 Capital & financial account balance 12,547 –4,856 –138.7 Source: Bank of Korea.
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External debt falls At end-November 2001 South Korea’s external liabilities stood at US$120.7bn, their lowest level since the late 1997 financial crisis and US$11.4bn below the year-earlier level. At the same time official foreign reserves have continued to rise. By end-December 2001 foreign reserves (including gold) totalled US$102.8bn, compared with US$92.2bn at the end of the same month of 2000. The rise in the reserves during 2001 was attributed by the BOK to the collection of foreign-currency deposits from the domestic banks, which fell from US$17.4bn at the end of 1999 to US$8.4bn at the end of 2000 to US$1.9bn at the end of 2001, and profits made on its own foreign currency holdings.
South Korea: external liabilities, 2001 (US$ m; end-period) Jun Jul Aug Sep Oct Nov Public sector 22,539 21,893 21,413 21,196 21,035 20,855 Financial institutions 46,437 45,282 46,171 46,212 45,166 44,526 Long term 24,401 24,803 25,348 23,014 23,630 23,501 Short term 22,036 20,479 20,823 23,198 21,536 21,025 Domestic companies 58,022 58,197 58,663 53,336 54,544 54,933 Long term 38,917 39,612 39,896 33,872 34,918 35,411 Short term 19,105 18,585 18,767 19,464 19,626 19,522 Total 126,998 125,371 126,247 120,745 120,745 120,315 Source: Bank of Korea.
EIU Country Report February 2002 © The Economist Intelligence Unit Limited 2002 32 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 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 grown in 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 February 2002 © The Economist Intelligence Unit Limited 2002 North Korea 33
Economic structure
Annual indicators
1996 1997 1998 1999 2000 Real GDP growth (%) a –3.6 –6.3 –1.1 6.2 1.3 Population (m) b 21.7 21.8 21.9 22.1 22.2 Exports (US$ m) c 848 1,025 644 597 708 Imports (US$ m) c –1,423 –1,473 –1,170 –1,212 –1,686 Trade balance (US$ m) c –575 –448 –526 –615 –978 Exchange rate (av; Won:US$) 2.15 2.20 2.20 2.20 2.20
January 18th 2002 Won2.20:US$1
Origins of gross domestic product 2000a % of total Agriculture, forestry & fishing 30.4 Mining 7.7 Manufacturing 17.7 Construction 6.9 Electricity, gas & water 4.8 Services 32.5 Total 100.0
Main exports 2000de US$ m Main imports 2000de US$ m Textiles 137.4 Machinery 206.0 Machinery & electronic goods 103.2 Grain 180.2 Marine goods 96.0 Textiles 172.6
Main destinations of exports 2000d % of total Main origins of imports 2000d % of total Japan 36.3 China 26.7 South Korea 21.5 South Korea 16.2 China 5.2 Japan 12.3 a Bank of Korea (Seoul). b National Statistical Office (Seoul). c Korea Trade-Investment Promotion Agency (Seoul); includes inter-Korean trade. d Korea Trade-Investment Promotion Agency (Seoul). e Excludes inter-Korean trade.
EIU Country Report February 2002 © The Economist Intelligence Unit Limited 2002 34 North Korea
Outlook for 2002-03
Political outlook
Domestic politics All indications are that the balance of power in North Korea is shifting towards military hardliners and away from reformers. Whereas 2001 began with remarks by the North’s leader, Kim Jong-il, on the need for change, and his clearly business-oriented visit to Shanghai, the 2002 new year joint editorial of three main daily papers, which sets the tone and priorities for the year ahead, was even more chauvinist and militant than usual. Boasting that “our leader, ideology, army, and system are the best in the world”, it averred that “the gun equals national power” and called for the immediate withdrawal of US forces from South Korea. Another new year message warned that “if the US imperialists and their allies dare to attack [North] Korea, they will be annihilated to the last one and no stronghold of the aggressors will be safe”.
In a striking revision of Marxist orthodoxy, North Korea’s army-first policy envisages the replacement of the working class as the country’s main revolutionary force by the military. This can hardly be welcome to the more usual substitute in communist practice, namely the communist party. There is still no sign of the long overdue seventh congress of the nominally ruling Korean Workers party (KWP). Instead, all focus is on this year’s significant birthdays: Kim Jong-il’s 60th on February 16th, and his late father Kim Il-sung’s (who remains the North’s “eternal president”, even in death) 90th on April 15th. The army’s notional 70th anniversary, dating from Kim Il-sung’s guerrilla days, will also be celebrated.
In principle such occasions might be used to announce a new turn, but there is no hint of this. Instead, attention is being devoted to North Korea’s biggest ever mass display, named Arirang, which will run from April to June and seems aimed in part at the tourist trade. Another question is whether Kim Jong-il’s son, Kim Jong-nam, who has no public profile so far (except when embarrassingly unmasked at Japan’s Narita airport in 2001, on a false passport—see August 2001, page 38), will be instituted formally as his father’s political heir.
International relations Domestic politics, always opaque, will be overshadowed by international issues. North Korea’s new-year belligerence is its ill-considered response to the challenges of September 11th and its aftermath. A regime that refuses to adjust even to such epochal changes as globalisation and the collapse of communism is no more adept at reacting to this new shock. On bad terms with the Bush administration already, North Korea’s initial response had positive elements: it condemned terrorism, and signed two treaties to combat it (and may sign five more). Latterly, however, especially after the US named it as a bio-weapons threat to add to the already long list of concerns, the North’s media has reverted to typical fiery rhetoric.
This is not just an opportunity wasted to improve ties with the US, as Iran is doing. It will also raise risk on the peninsula. Although the precise thrust of the
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US campaign on terrorism after Afghanistan is unclear, and those in Washington wanting to widen the fight have Iraq next on their list, henceforth the US looks set to be markedly less patient with those it regards as rogue states. This is really not a sensible time for the usual suspects to draw attention to themselves, much less pick a fight with a superpower. It will now get yet harder to reach agreement on missile or nuclear issues, even if talks do restart.
The sinking in December 2001 by Japan’s Marine Self-Defence Force (Japan’s de facto navy) of a suspected North Korean spy ship suggests a similar recklessness towards another major power that Pyongyang should not provoke. If Koreans fear a resurgence of Japanese militarism, such actions, like the rocket North Korea fired over Japan in 1998, can only encourage just that. It will be hard for Kim Dae-jung, soon to retire and himself criticised as soft on the North, to temper his allies’ growing impatience. China and Russia may protect Kim Jong- il up to a point, but a recent Pyongyang boast that Kim Jong-il’s visit to Moscow in August 2001 “dealt a heavy blow to the lone superpower’s new iron-fisted order … and hegemonic strategy” indicates that North Korea has not taken on board the sharp shift made by the Russian president, Vladimir Putin, westwards since September. A year from now, South Korea too will have a new and probably less tolerant leader. Never has it been more urgent for North Korea to rethink how it confronts the world, and change its shrill tune.
Economic policy outlook
Economic policy The primacy of politics means that the economy will continue to suffer in 2002. Although the new year editorial reported in the country’s media cites the need to “improve decisively the people’s living standards” as key to “realising the notion that our system is best in the world”, it eschews as ever the reforms that are necessary in order for this to happen. Instead there are familiar mantras: a breakthrough in power, coal, metals, and railways (but how?); science and technology (but where will the money come from?); land rezoning, more likely to lower than raise crop yields; and the “Torch of Ranam”, the latest of many doomed efforts to substitute mere zeal for the capital investment and market reforms that are needed.
Recent visitors have detected a alight whiff of change in the Pyongyang air, with reports of technocrats having been promoted and more foreign business seeking to set up. However, we have been here before. North Korea has been on the brink of change for at least a decade—and on the brink it remains. Notwithstanding a saying popular in Seoul—sijaki banida, the first step is half the journey—it is the second step, when it comes, that will show that real reform is at last under way. Until then, claims of economic recovery are premature. A German source talks of major efforts to “increas[e] exports … within their existing structures”; yet the latest trade figures show that this is not working, for indeed squaring the circle cannot work.
EIU Country Report February 2002 © The Economist Intelligence Unit Limited 2002 36 North Korea
The political scene
Kim Jong-il appeared more No visible developments disturbed the surface tranquillity of North Korean with the military in 2001 domestic politics in late 2001. For the year as a whole, according to South Korea’s unification ministry, the North’s formerly reclusive leader, Kim Jong-il, appeared in public 83 times, ten times more than in 2000. By category, military-related visits totalled 39, almost double the 21 made in 2000, while his “on-the-spot guidance” at economic sites fell slightly, from a record 25 in 2000 down to 20. A relatively new category, diplomatic or foreign-related appearances, numbered 12: notably Kim Jong-il’s visits to Russia and China.
In the absence of normal political activity like central committee sessions, the company kept by Kim Jong-il gives some sign of who is in and out of favour. The watchers in Seoul tallied 25 cabinet ministers, 22 party officials, and 12 military officers at various times in his entourage. In terms of frequency, however, the order is reversed. Kim Jong-il’s most regular companions were two generals, Hyun Chul-hye and Pak Jae-kyong, both deputy heads of the political bureau of the Korean People’s Army (KPA), on 49 and 48 occasions respectively. Not far behind was Kim Kuk-tae (44), now pre-eminent among several party secretaries, unlike the rarely seen Kim Yong- sun, who was in charge of the peace process with the South.
The North signs two anti- In foreign affairs North Korea’s main challenge was how to react to the terrorism treaties continuing fall-out from the September 11th terrorist attacks on the US, especially the US military operations in Afghanistan. Although a degree of ambivalence persists on both sides, on balance the upshot has been to increase mutual suspicions, if not yet tensions, between North Korea and the US. On the positive side, in November 2001 North Korea signed two anti-terrorism treaties, and in December a hastily arranged Swedish-led EU mission to Pyongyang reported its readiness to endorse a further five, although it was not clear as of mid-January this year whether it had actually done so.
This latest European attempt to promote peace followed a potentially worrying new turn. In November last year the US under-secretary of state for arms control and international security, John Bolton, accused North Korea of having an “extremely disturbing” biological weapons programme, second only to Iraq in its menace. Although North Korea has long been suspected of developing both chemical and biological weapons, these had not previously been raised as an active concern. This adds yet another item to the already long agenda of nuclear, missile, terrorism and conventional forces issues. Pyongyang media in turn attacked the US for “ceaseless mudslinging”, and their tone increasingly reverted to the familiar denunciation of the US. None of this suggests an early or easy return to the dialogue of the Clinton era.
Japan adopts a tougher line Relations with Japan, never good, worsened markedly at end-2001, owing to towards North Korea two developments. In the first, from November, Japanese police raided offices and credit unions of Chongryun (Chosensoren in Japanese), the organisation of pro-North ethnic Koreans in Japan, and arrested several officials for financial irregularities. The suggestion is that fraudulent loans were set up to disguise
EIU Country Report February 2002 © The Economist Intelligence Unit Limited 2002 North Korea 37
substantial transfers to North Korea, estimated at up to US$1bn a year, and as such one of the country’s main sources of foreign exchange.
Both Chongryun and Pyongyang media cried foul, claiming racial persecution in that only Koreans were targeted; but omitting that Korean-owned institutions had hitherto been aided equally with Japanese ones by official bail- outs, to the tune of US$4.2bn so far. The idea of Japanese taxpayers propping up Kim Jong-il has infuriated conservatives; as one Japanese MP put it, “We pay them money and we get Taepodong missiles as a receipt”. Having for years tacitly tolerated these flows to the North, it is interesting that Japan has chosen to strike now, just when North Korea needs the money more than ever, for lavish celebrations of the birthdays of Kim Jong-il and of his late father, Kim Il-sung, in the next three months.
Japan sinks a suspected In the second, a harder line was also evident in December when the Japanese North Korean spy ship Marine Self-Defence Force pursued and fired on a suspected North Korean spy ship, which sank, seemingly scuttled by its own crew, who all perished, just inside Chinese waters. That aspect, plus the degree of force used—previous intruders had been allowed to get away—brought criticism in the South’s press as well as paroxysms from the North, which denounced “piracy” even while denying any link to the vessel. However, the three bodies and items recovered leave no real doubt. Being tougher on a neighbour that most Japanese dislike and mistrust will do Japan’s prime minister, Junichiro Koizumi, no political harm at home, but will hardly help relations with either Korean state. It may also backfire. In January Japanese coastguards boarded another North Korean ship after a tip-off that it had put agents ashore, which turned out to be a hoax.
The domestic economy
Aid and imports soar, while In North Korea as anywhere else, hopeful talk of an upturn needs to be exports fall checked against the numbers, such as they are. Since the North still does not deign to issue statistics (as it must, if it is ever to join the IMF and World Bank), the most solid indicators we have are trade figures, laboriously compiled from data published by North Korea’s partners.
In December last year the (Southern) Korea Trade-Investment Promotion Agency (known as Kotra) published a report on the North’s merchandise trade in the first half of 2001. The good news is that the value of total trade rose by nearly 80%, from US$846m in the first half of 2000, to US$1.5bn. The bad news is that almost all of this was accounted for by the import bill, which more than doubled from US$582m in 2000 to US$1.3bn. Export earnings, by contrast, actually fell, from US$264m to US$244m. The whole picture is skewed by Japanese rice aid, valued at a subsidised domestic price of US$535m, which misleadingly catapults Japan above China as North Korea’s top trading partner. Excluding this, the North’s total merchandise trade rose by 16% year on year, to US$976m. The cost of imports rose by 26% to US$732m, still three times more than exports, to give a half-year deficit of US$488m, up by 54% from US$318m.
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South Korea excludes its This feeble and falling export performance—a mere US$244m in half a year: far own trade with the North less than South Korea exports in a single day (US$413m)—does not suggest a country that is in the middle of an economic recovery. These data are incomplete since, like all official South Korean sources, Kotra omits what it calls intra-Korean trade, as being ostensibly internal. However, that distorts the results: the South is the North’s third largest partner after Japan and China, with total “trade” of US$197m in the first half of 2001. Here again a nominal breakdown of US$63m in Northern exports and US$134m in imports looks different if Southern aid is excluded. For the first ten months of 2001, US$146m or 44% of total inter-Korean trade of US$330m was in fact aid of various kinds. Stripping this out leaves US$184m in real trade, with, as usual, a surplus to North Korea on exports of US$131m as against imports of US$53m.
The top three partners all A similar pattern of aid disguised as trade arises for North Korea’s top two aid as much as trade partners. With Japan it is temporary, as the rice aid was a one-off that, in the present political mood, is unlikely to recur soon. Without this, its Japan trade is as near as North Korea gets to a normal bilateral trading relationship. The value, less than US500m annually, is tiny by today’s Asian standards, and, worryingly, with the rice aid removed, seems to be falling on both sides of the ledger. Yet it is fairly stable over time and reasonably balanced, usually with a slight surplus. Contrast China, which without Japan’s rice aid would as usual have been North Korea’s number one trading partner. Although both sides of the ledger rose markedly year on year in percentage terms—export earnings were up by 71.6%, the import bill up by 80.8%—North Korea only sold goods worth US$25m, while receiving more than ten times as much (US$287m). With a cumulative trade deficit to China of US$3.9bn during 1990-2000, this again is really aid rather than trade. China once tried to enforce payment, but now tolerates such subsidy as a price worth paying to ward off the risk of its neighbour collapsing completely.
India is an important Even without the distorting effect of Japanese rice aid, these three neighbours trading partner account for well over half of North Korean merchandise trade. Below them is a shifting rank order of other Asian and European partners: again with tiny figures by today’s standards, and sharp imbalances or year-on-year changes suggesting one-off deals, rather than stable ties. India has vaulted into third place—fourth, counting South Korea—with trade of US$94m, which was composed entirely of imports: exports were nil. With its next five partners— Singapore, Thailand, Germany, Hong Kong, and Spain—North Korea again ran large deficits, in most cases with growing figures. In at least some cases the North failed to meet its import costs, which may be why trade with Thailand, which has long been owed payment for rice sales, fell by 17.5%.
Although it will take a while for such detailed figures to be collated for 2001 as a whole, Kotra’s preliminary estimate of total North Korean merchandise trade for the year is US$3bn, up by 50.8% over 2000. Excluding aid the total falls to US$2.1bn, a rise of only 4%. This again excludes inter-Korean trade, so true trade may have been around US$2.3bn: less than 1% of South Korea’s US$291.7bn.
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Daiei of Japan imports Even with a major and regular partner like Japan, comparative advantage is not North Korean suits used consistently. Japan’s struggling Daiei department store group is selling suits made in North Korea for US$80. At one time North Korea had a quarter of the Japanese market for cheap off-the-peg suits; clothes are its second most important export item to Japan, generating earnings of US$28m in the first half of 2001, after seafood, which brought in US$52m. Yet the value of such exports remains low, with chronic problems in ensuring timely delivery: most recently owing to Pyongyang arbitrarily banning vessels of one South Korean shipping company, thus delaying processing-on-commission (POC) trade with Japan too, which usually transits via Incheon in the South.
North Korea: merchandise trade, Jan-Jun (US$ m) Exports Imports T otal trade Jan-Jun Jan-Jun % Jan-Jun Jan-Jun % Jan-Jun Jan-Jun % Country 2000 2001 changea 2000 2001 changea 2000 2001 changea Japan 120.5 108.3 –10.2 104.6 602.6 476.0 225.1 710.8 215.7 China 14.3 24.6 71.6 158.5 286.6 80.8 172.9 311.2 80.0 India 8.8 0.0 –100.0 70.7 94.2 33.1 79.5 94.2 18.5 Singapore 1.8 2.9 62.6 20.5 71.2 248.2 22.3 74.2 233.1 Thailand 13.6 9.0 –34.0 56.9 49.2 –13.5 70.5 58.2 –17.5 Germany 9.0 8.5 –5.7 25.1 32.2 28.2 34.1 40.7 19.3 Hong Kong 25.2 16.5 –34.3 34.4 19.9 –42.1 59.5 36.4 –38.8 Spain 5.8 7.8 34.8 4.7 14.8 214.9 10.5 22.6 115.9 Bangladesh 13.4 21.5 60.7 0.9 0.7 –26.0 14.3 22.1 55.1 Russia 1.6 1,474.0 –6.8 23.2 19.6 –15.7 24.8 21.0 –15.1 UK 1.0 522.0 –48.4 13.1 15.7 19.6 14.1 16.2 14.8 Austria 0.9 6.0 547.0 7.0 9.0 27.6 8.0 15.0 88.5 The Netherlands 7.5 7.4 –1.1 5.9 4.1 –31.1 13.4 11.5 –14.3 France 11.9 5.3 –55.0 6.6 3.2 –51.7 18.4 8.5 –53.9 Italy 2.8 0.8 –71.2 6.1 4.1 –33.1 8.9 4.9 –44.9 Indonesia 0.8 0.7 –14.9 10.0 1.8 –82.0 10.7 2.5 –77.2 Total 238.7 221.3 –7.3 548.2 1,228.8 124.1 787.0 1,450.0 84.2 Others 25.4 23.0 –9.1 33.6 37.9 12.8 59.1 60.9 3.1 Grand total 264.1 244.3 –7.5 581.8 1,266.6 117.7 846.1 1,510.9 78.6 a Percentage changes calculated on unrounded figures.
Source: Korea Trade-Investment Promotion Agency.
EIU Country Report February 2002 © The Economist Intelligence Unit Limited 2002