North Korean nuclear threat is not the only crisis on South Korea’s horizon
Lee Jong-Wha says Seoul should focus on more than just North Korea, given its domestic economic weaknesses and the need to strengthen relations with both the US and China
In November 1997, South Korea faced a sudden withdrawal of foreign capital, coupled with its financial institutions’ inability to borrow from abroad, depleting the country’s international reserves.
The following month, Seoul turned to the International Monetary Fund, and launched painful structural reforms. Millions of jobs were lost and, in 1998, the economy contracted 5.5 per cent.
But government-led reforms made progress addressing structural weaknesses, so the economy weathered the 2008 global financial crisis better than most.
Today, however, South Korea is beset by rapid population ageing, labour market inefficiency, institutional weakness and low service sector productivity. As the labour force shrinks, the economy loses vitality.
Externally, South Korea is highly vulnerable to the North Korean nuclear threat. The United States is now attempting to pressure China to curb the threat. While China has agreed to enforce economic sanctions more actively, it doesn’t want the regime to collapse.
China calls for calm over North Korea as US flexes military muscle and clock ticks down to key congress
Moreover, China has called for the withdrawal of the US military’s missile defence system from South Korea, and used its economic might against the South. China accounts for 25 per cent of South Korea’s total exports, giving it substantial leverage.
Meanwhile, the Trump administration, concerned about its bilateral trade deficit, has threatened to renegotiate the free-trade agreement with the South.
South Korean President Moon Jae-in wants to employ “balancing sanctions and dialogue” with the North. But South Korea has not managed to improve relations with its ally, the US, never mind China. It has got nowhere in reviving inter-Korean talks.
These failures have many Koreans scared. The South is now debating developing its own nuclear weapons or bring ing US tactical nuclear bombs back. Either approach would antagonise China.
In the 1990s, South Korea waited for matters to come to a head before responding. This time, it must nip the incipient crisis in the bud. That means accelerating domestic structural reforms to improve productivity, enhance labour-market efficiency, upgrade institutions and foster a business environment supporting modern service industries and innovative start-ups. It means strengthening both economic and diplomatic ties with major countries, the US and China in particular.
Neither agenda will be easy to pursue. But South Korea’s future prosperity, if not its very survival, depends on its leaders’ efforts on both fronts in the months and years ahead.
Lee Jong-Wha is professor of economics and director of the Asiatic Research Institute at Korea University. Copyright: Project Syndicate