THE POLITICAL ECONOMY OF SOUTH KOREA UNDER THE NEW INTERNATIONAL ORDER By Pyo Hak-kil Abstract The political economy in South Korea changed immensely through a series of internal and external events in 2011 and 2012. $WWKHVDPHWLPHDFWXDOHFRQRPLFSHUIRUPDQFHZDVGLVDSSRLQWLQJDQGIDUOHVVWKDQWKHSHUFHQWWKDW3UHVLGHQW/HH0\XQJEDN had envisioned. The economic picture also worsened for households and businesses as households saw consumer prices rise by 4 percent, while businesses faced increasingly higher prices for oil. At the same time, household debt surpassed 900 trillion won and all of the indicators of income inequality worsened. The National Assembly elections saw both political parties push for increased welfare spending. However, the proposals put forward by both parties may not be feasible due to constraints on the JRYHUQPHQW¶VWRWDOEXGJHW:LWKWKHJOREDOHFRQRPLFFRQGLWLRQFRQWLQXHG¿VFDOWURXEOHVLQ(XURSHDQGDVORZGRZQRIHFRQRPLF growth in China, Korea also faces reduced expectations for economic growth in the year ahead. OVERVIEW AND MACROECONOMIC ISSUES - 7 Introduction bright side of the economic performance was a strong export performance. The f.o.b.-based export amount increased at the In 2011, the landscape of the political economy in South average annual rate of 11.7 percent while the c.i.f.-based import Korea changed immensely through a series of internal and amount increased by 12.8 percent. It was largely due to the H[WHUQDOHYHQWV7KHHDUWKTXDNHDQGLWVDIWHUPDWKLQ-DSDQ depreciation of won from 938.2 won per dollar at the end of DQG WKH ¿VFDO FULVLV LQ (XURSH ZHUH WZR H[WHUQDO HYHQWV 1997 to 1,257 won per dollar at the end of 2008 after the while the new political syndrome after the election of a new JOREDO ¿QDQFLDO FULVLV DQG WR won per dollar at the progressive mayor in Seoul and the sudden death of Kim HQG RI 7KH 2(&' (FRQRPLF 6XUYH\V 1 state -RQJLO ZHUH WZR UHPDUNDEOH HYHQWV ZLWKLQ WKH .RUHDQ SHQ- that the sharp depreciation of the won helped to trigger insula. In early 2012, U.S.-North Korea bilateral talks were .RUHD¶V UHERXQG E\ VLJQL¿FDQWO\ LPSURYLQJ LWV LQWHUQDWLRQDO LQLWLDWHGE\3UHVLGHQW2EDPDDQG1RUWK.RUHD¶VQHZOHDGHU competitiveness, and thus raising Korea from the world’s .LP-RQJXQZLWKDQDFFRUGPDGHRQ)HEUXDU\WROLPLW 12th largest exporter in 2008 to ninth in 2009. In summary, North Korea’s nuclear activities. But on April 14, less than WKHDYHUDJH*'3JURZWKUDWHRISHUFHQWGXULQJWKHODVWIRXU six weeks after the accord was signed, the new North Korean years of the Lee government was maintained by export regime launched a long-range missile equipped with a satellite performance through the depreciation of won against the without regard for a U.N. resolution and paying no heed to dollar and yen. But the extra export earnings were not fully the United States and even to its biggest patron, China. channeled to the non-exporting sectors and therefore, the growth The timing of the missile launch was deliberately chosen RI *1, DIWHU EHLQJ DGMXVWHG E\ XQIDYRUDEOH WHUPV RI WUDGH to inaugurate Kim Il Sung’s 100th birthday on April 15; effects through increased oil prices remained stagnant. One WR FHOHEUDWH WKH DSSRLQWPHQW RI .LP -RQJXQ DV WKH )LUVW of the reasons is the concentration of high export performance 6HFUHWDU\RIWKHUXOLQJ:RUNHUV¶3DUW\WKHGHIDFWROHDGHU in a few IT-related products. During the period of 2000- of the regime at a special conference on April 11; and to 2009, higher IT-intensity manufactures’ real exports have disturb general elections in South Korea on the same day. LQFUHDVHG DW WKH DQQXDO UDWH RI SHUFHQW ZKLOH ORZHU But the missile launch failed in the early morning of April IT-intensity manufactures’ real exports increased at the 14, and there is wide-spread speculation this failure would annual rate of 4.09 percent. During the same period, the increase the likelihood of a follow-up nuclear detonation as a DQQXDOJURZWKUDWHVRIUHDO*'3LQWZRVHFWRUVZHUHSHUFHQW face-saving effort. South Korea must face the new realities of and 3.78 percent respectively, which implies that export-output this international political order. Instability in the North ratio was much larger in higher IT-intensity sectors than in Korea regime as demonstrated by the failed missile-launch lower IT-intensity sectors. may signal violent confrontation ahead. $FFRUGLQJWR1DWLRQDO$FFRXQWV SUHOLPLQDU\ UHOHDVHGRQ ,Q6RXWK.RUHDWKHJRYHUQLQJ1HZ)URQWLHU3DUW\KDVZRQWKH March 30, 2012 by the Bank of Korea, 2011 was a disappointing JHQHUDOHOHFWLRQZLWKDQDUURZPDUJLQ VHDWV DJDLQVWWKH year for both businesses and households. The per capita Gross RSSRVLWLRQFRDOLWLRQRI'HPRFUDWLF8QLWHG3DUW\ VHDWV 1DWLRQDO,QFRPH *1, LQZDVHVWLPDWHGWREH DQG8QLWHG3URJUHVVLYH3DUW\ VHDWV :KHQLQGHSHQGHQW which is only a 1.5 percent increase due to the worsening ZLQQHUVDUHLQFOXGHGWKHQXPEHURIFRQVHUYDWLYHV VHDWV WHUPVRIWUDGHE\LQFUHDVHGRLOSULFHVDQG&3, SHUFHQW DQG LVVOLJKWO\ODUJHUWKDQWKHQXPEHURISURJUHVVLYHV VHDWV reduced semiconductor prices. The net savings rate by house- The opposition coalition gained many more seats in this holds continued to decline from 4.1 percent in 2009 to 3.9 general election than the previous one in 2008 which was held SHUFHQWLQDQGSHUFHQWLQ*URVV¿[HGFDSLWDO MXVWDIWHUWKHLQDXJXUDWLRQRI3UHVLGHQW/HH0\XQJEDN7KH formation declined by 1.1 percent from 2010 with construction Lee government lost popularity, particularly among younger LQYHVWPHQW SHUFHQW DQG HTXLSPHQW LQYHVWPHQW generations and voters in the Seoul metropolitan area. While SHUFHQW ZKLFK UHFRUGHG D GUDVWLF GHFOLQH IURP the government has claimed that South Korea has escaped SHUFHQW 7KHJURZWKUDWHRIUHDO*'3LQZDVSHUFHQW IURPWKHJOREDO¿QDQFLDOFULVLVRIZLWKUHODWLYHO\ ZLWKPDQXIDFWXULQJ SHUFHQW FRQVWUXFWLRQ SHUFHQW better recovery than most other nations, public sentiment has DQGVHUYLFHV SHUFHQW been against the claim. :KLOH WKH &RQVXPHU 3ULFH ,QGH[ &3, LQFUHDVHG E\ Macroeconomic Performance During SHUFHQWODVW\HDUWKHSULFHRIDJULFXOWXUH¿VKHU\DQGFDWWOH 2008-2011 LQFUHDVHG E\ SHUFHQW $V D FRQVHTXHQFH WKH (QJHO FRHI¿FLHQW ZKLFK PHDVXUHV WKH SURSRUWLRQ RI KRXVHKROG 7KHDFWXDOHFRQRPLFSHUIRUPDQFH SHUFHQWDYHUDJHJURZWK expenditure on food and non-alcoholic beverages in total RIUHDO*'3DQGSHUFHQWDYHUDJHJURZWKRIUHDOLQYHVWPHQW household expenditure, increased from 13.8 percent in 2010 during 2008-2011 has been disappointing and far less than WR SHUFHQW LQ DFFRUGLQJ WR WKH 1DWLRQDO 6WDWLVWLFDO WKHFDPSDLJQYLVLRQRISHUFHQWUHDO*'3JURZWK7KHRQO\ 2I¿FH RI .RUHD 7KH (QJHO FRHI¿FLHQW RI WKH ¿UVW GRFLOH 8 - KOREA’S ECONOMY 2012 WKH ORZHVW SHUFHQW LQFRPH JURXS LQFUHDVHG IURP SHQVLRQ V\VWHP UHPDLQV UHODWLYHO\ LQVXI¿FLHQW WR VXSSRUW percent to 23.5 percent which is a record high and ten UHWLUHHV7KH*LQLFRHI¿FLHQWIRUWKRVHDJHGDQGROGHULQ SHUFHQWDJHSRLQWVDERYHWKHDYHUDJH(QJHOFRHI¿FLHQWIRUWKH .RUHDLVORZHUWKDQ0H[LFR DQG&KLOH entire household. EXWKLJKHUWKDQWKH86 -DSDQ )UDQFH *HUPDQ\ DQG WKH &]HFK 5HSXEOLF 7KH *LQL Household Debt Overhang and Growth FRHI¿FLHQWIRUWKHDJHJURXSWRLQ.RUHDLVHVWLPDWHGWR with Inequality EHORZHUWKDQPRVWRIFRXQWULHV&KLOH 0H[LFR The Bank of Korea announced that total household debt had 7XUNH\ 86 ,VUDHO 3RUWXJDO surpassed 900 trillion won by the end of 2011, which reached $XVWUDOLD DQG-DSDQ 7KHODUJHJDSLQ EH\RQGSHUFHQWRIQRPLQDO*'3DQGSHUFHQWRIWRWDO WKH*LQLFRHI¿FLHQWVEHWZHHQ.RUHD¶VZRUNLQJJHQHUDWLRQDQG wages and salaries. The switch of commercial loans from the senior citizens indicates that there is lack of post-retirement indebted corporate sector to the mortgage-backed household SHQVLRQIXQGDQGWKHUHIRUHWKHUHLVDPDMRUZHOIDUHSUREOHP sector by both the primary and secondary banking sectors ,WUHÀHFWVWKDWSDUHQWVRIWKHEDE\ERRPJHQHUDWLRQVSHQWWRR DIWHU WKH ¿QDQFLDO FULVLV RI KDV EHHQ WKH PDLQ much money on their children’s education, and saved too little cause of the households’ debt overhang. Fueled by the low money for their own retirement. interest rate policy by the government, the real estate market had a boom and a bust during the last decade. The government Welfare Expenditure Spree and Vision introduced a set of regulations on real estate loans in order to 7KH ZHOIDUH H[SHQGLWXUH OHYHO LQ MXVW SULRU WR WKH /HH FXUE KRXVLQJ LQÀDWLRQ DQG PDQ\ KRXVHKROGV DUH VTXHH]HG JRYHUQPHQW ZDV DERXW WULOOLRQ won which accounted by inactive real estate transactions and mortgage-backed for 25.9 percent of total government expenditure. However, KRXVHKROG ORDQV$FFRUGLQJ WR D UHSRUW E\ WKH 6HRXO 3ROLF\ ZHOIDUHH[SHQGLWXUHLQZLOOLQFUHDVHWRWULOOLRQwon² Development Institute, the household debt of Seoul residents 28.5 percent of total government expenditures. The govern- is estimated at about 204 trillion wonDQGDERXWSHUFHQWRI ment’s third Welfare Task Force forecasts a total minimum of Seoul households are currently indebted. The ratio of household WULOOLRQwon WULOOLRQwonSHU\HDU ZLOOEHUHTXLUHG GHEWZDVORZHU SHUFHQW ZKHQDQQXDOKRXVHKROGLQFRPH WRIXO¿OOZHOIDUHYLVLRQVPDGHE\ERWKWKHUXOLQJSDUW\DQGWKH ZDVDERYHPLOOLRQwon, compared to household income of opposition party before the general election. Since the total 20-30 million won SHUFHQW government budget in 2012 is 325.4 trillion won and the wel- $FFRUGLQJWRWKH1DWLRQDO6WDWLVWLFDO2I¿FH¶VUHSRUWRQ+RXVH- IDUHEXGJHWLQLVWULOOLRQwon, the next government KROG ([SHQGLWXUH 6XUYH\ LQ DOO RI WKH LQGLFDWRUV RI would need about 82.4 percent of the total budget in 2012 over income inequality have worsened. The relative poverty ratio, WKHQH[W¿YH\HDUSHULRG,WDOVRLPSOLHVWKDWWKHWRWDOJRYHUQ- ZKLFKLVGH¿QHGDVWKHUDWLRRIKRXVHKROGVLQFOXGLQJRQHPDQ ment budget and the welfare budget need to be increased households and