Monday, December 13, 2010

The Year in Review: Is Lee Myung-Bak the President of the Year?

South Korea Has Accumulated Impressive Gains During 2010
As native Koreans would be glad to share with foreigners, Korea is far from perfect.  Nevertheless, the branches of government have navigated exceptionally difficult conditions very well during 2010.

Here is a partial list:
a.  Korea's economic growth was the greatest amongst OECD members during the 2nd Quarter 2010.
b.  Korea's official unemployment rate has steady at a low 3.7%.
c.  Foreign exchange reserves, the world's sixth largest, are near an all-time high at $290.23 Billion.

Circumstances Have Favored South Korea
Many of the positive things that have happened to the Korean economy are the result of circumstances alone.  Here is a partial list of those circumstances which has benefited Korea.
a.  Governments around the world have stimulated their economies which has resulted in continued economic demand for Korean-made products.
b.  The strength of the Japanese Yen has made Korean-made products cheaper, which has greatly helped Korean corporations (chaebol). 
c.  China, the world's most populous nation, has continued its torrid economic growth.

It has been a nearly-ideal situation for Korea:  its largest trade partners are relentlessly attempting to avoid Japan-like deflation by continually stimulating their economies with monetary and fiscal measures.  Korea's largest potential market, China, continues to grow unabated as the Chinese government is trying to develop China into a modern economy.  Japan, the nation with the majority of direct competitors to Korean corporations, are saddled with sagging domestic demand and a currency which has made their products expensive relative to Korea's in international markets.

The South Korean Government Has Acted to Strengthen Its Hand
While it may be suggested that South Korean President Lee Myung-Bak has merely been in the right place at the right time, there is little doubt that the President Lee and other governmental agencies have taken steps to provide for Korea's citizens, as well as to improve Korea's stature on the world stage.
a.  Korea has only gradually reduced its fiscal stimulus programs because it has remained cautious regarding the sustainability of the global economic recovery.
b.  Korea and the U.S., finally, have agreed on a Free Trade Agreement, which should improve the quality of life in Korea, and reduce inflation for Koreans.
c.  The Bank of Korea has acted to keep the Korean Won relatively cheap in order to keep its export growth strong.  While this has longer-term risks, this has helped Korean corporations in the short run.
d.  Korea's emergence on the international stage was made obvious by its hosting of the G20 Seoul Summit in November. Even if you do no believe that much was accomplished, the fact that the meeting was hosted in Korea demonstrates its continuing importance on the world stage.

Korea Still Faces Fundamental Challenges
While Korea has enjoyed, as a nation, economic conditions which are superior to almost all other OECD nations, fundamental problems exist which cannot be solved overnight.  In addition, only dramatic policy changes would have any effect, and the side-effects may be undesirable to many.  Here are just a few lingering issues.  Each issue itself is worth a post, which you will be able to find here at in the future. 
a.  The value of real estate continues to disappoint owners.  The value of real estate has actually declined in Seoul over the past two years, whereas in Hong Kong and Tokyo, prices have entirely recovered (Hong Kong) or are still recovering.  This is not occurring in Korea.  That is a problem because people's belief about their wealth is tied to the value of their homes.  Real estate represents a greater percentage of a Korean's net worth than most other countries in the OECD.  One reason the Bank of Korea is reluctant to increase interest rates?  Increased interest rates leads to lower real estate prices, something that could lead to less consumer spending in Korea.
b.  The increasing average age of the Korean population may weigh on social programs.  Many Koreans do not believe that the Korean National Pension Service will be able to help those who currently work, when they retire.  Assuming that Koreans want the Korean Pension Service to survive, the choices seem to be either higher taxes, or lower entitlements.  Fundamental changes to the structure of the Korean pension system may be more feasible in Korea when compared to the U.S., where the system has been in place for a much longer period of time.
c.  Underployment will continue to be a problem, as has been posted here.  The bottom line is that Korea is over-educated, given the number of skilled workers needed in a nation of only 50mm.   Comparisons among Korean workers are drawn using increasingly irrelevent criteria.  How to resolve this will be the topic of a decades-long debate.
d.  The private tutor (hagwon) system threatens the Korean family and the Korean economy.  It isn't the goal of this article to discuss whether or not Korean students should study so hard, or if Korean parents should attempt to send their children to multiple hagwons per day.  What is clear, however, is that the average Korean family spends too much of its disposable income on the private tutor system in Korea.  That means less consumer spending and increased stress on the Korean family.
For those that have studied economics, a dollar spent on the hagwon system does not have the same multiplier effect on the Korean economy that other consumer spending has.  For example, if a student spends $200 a month on a hagwon, that money is used to pay the rent and  the teacher of the hagwon.  However, that same $200, if spent on a consumer good, such as food, then the entire support system (e.g. a restaurant, its workers, the farmers of ingredients, etc) is far larger.  In short, the money used in hagwons has a definite "dead end" to where the money goes.  Money used elsewhere, The Lost Seoul contends, would have a greater, wider economic impact.
The hagwon system has been criticized for encouraging a greater separation among people of different economic classes.  The government has publicly raised this concern.  Recent attempts to try to standardize the questions for the college entrance exam in Korea have been widely (and justifiably) criticized due to the lack of thorough planning and poor execution of implementing the new system.  However, the fact that the government is attempting to do so is a step in the right direction.  Hopefully, these types of measures will be ultimately successful.
d.  Inflation.  Currently, inflation is much higher than is being reported in governmental figures.  Everyday Koreans will tell you this.  Being energy and resource poor, Korea will be face increasing inflationary pressure as a result of the demand for resources because China's demand will not fade.  Currently, the Lee administration has acted in some way to accelerate Free Trade Agreements.  However, as long as the Korean Won is held lower than is justified on international markets, import prices in Korea will remain very high, contributing to higher inflation. 

Conclusion:  Korea Needs the Next Generation of Leaders
Korea is resembling the United States more everyday: complaining about the government has become a national hobby.  At some level, the government has failed for one reason or another.  However, when compared to its counterparts in other nations, the Lee Administration has performed admirably.  The question now is how to solve the longer-term problems, without upsetting the delicate balance that currently exists.  In order for the younger generation of Koreans to take the reins, careers in government and public service must be more prestigious and frankly, better compensated.  It is no coincidence that another widely-commended Asian government, Singapore's, attracts some of the brightest from the best universities in Singapore.  Singaporean officials are among the most well-compensated officials in the world.  Korea must cultivate those in their 30s and 40s to prepare to become the policymakers for the future.  If Korea can do this, then it can solidify the hard-won gains since the end of the Korean War.
While President Lee's early years were difficult due to the global financial crisis, the fact is that Korea, and President Lee has deftly dealt with the situation.  It can be said that Korea's position in the world economic order has improved quite a great deal since the onset of the crisis.  As stated above, some of that is the result of favorable circumstances.  Nevertheless, it is a fact that when things go well, the leader is given a great deal of the credit.  In this case, President Lee and the Korean government deserve many of those accolades.


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