I LEFT booming Shanghai on Sunday for South Korea, Asia’s fourth largest economy, to attend a gathering of social scientists in the future city of Incheon and its adjacent port.
This ancient city is Korea’s first Free Economic Zone (1,000 sq km), designated in 2003. It is already fast becoming an intelligent high-tech city with state-of-the-art infrastructure and facilities to house world-class businesses, schools, universities, hospitals and MICE and cultural complexes.
This sets Incheon as the next northeast Asian hub for global logistics and centre for investment. What I saw was most absorptive – a far cry, I thought, from the Port Klang Free Zone that failed to be.
You can’t but be impressed with the Koreans’ determination to do what it takes to seriously compete with its two towering neighbours – China and Japan, and India.
It’s the beginning of spring in Incheon, but it snowed! First time in 40 years, I am told. A rare treat.
This meeting of a mix of some smartest analysts in economic affairs and public policy from the US, Europe and Asean+3 provided the needed warmth to fascinate each other on the prospective state of goings-on in the world, especially Asia.
The collaborative research of young Koreans was an eye-opener. I intend to share some of their analytics and findings in the hope that we can learn from their lessons and policy action experience.
Korea before global crisisKorea was hard hit in the 1997/98 financial crisis. But rebounded with V-shaped recovery in 1999. Since then, economic fundamentals had consolidated and strengthened to grow at over 4% a year in the 2000s. Reforms were undertaken to re-strategise underlying macroeconomic structures and the financing framework of banks and enterprises.
The objective was simple: Transform the economy and inject sufficient resilience to withstand the next crisis.
The focus was to allow private enterprise and initiative take the lead, with increasing reliance on the market for price discovery and to sharpen competitiveness. Indeed, Korea has since relied on market power to drive adjustment to basic macroeconomic soundness but with varying success. It significantly liberalised the financial market.
Restrictions against foreign investment were lifted; exchange rate was allowed to float; foreign capital was encouraged to move in (foreign investment was soon 40% of total listed shares); and banks were pushed to restructure, recapitalise and improve basic soundness.
Korea’s corporates and industry responded by strengthening governance and balance sheets, reduced debts, and restructured and re-invested to raise productivity.
With new-found confidence, Korea raised its share in some global markets as weaker competitors exited, e.g. in semi-conductors and LCDs. Korean autos penetrated deeper into the US, European and Asian markets.
Indeed, Korea had the audacity during the crisis not just to reform, restructure and rebuild, but also to invest in new private productive capacity for sustained future growth.
Its rising competitiveness was reflected in strong export growth for 10 years since 1997. By end-2007, Korea’s foreign exchange reserves rose to US$262bil, as against only US$20bil in 1997.
Shocks from the global crisisNot unlike its neighbours, the 2007/08 global turmoil hit Korea hard, even though it had restructured its economy and built some resilience.
Impact of the severe shocks was visible in the virtual collapse in export demand; and the tightening financial markets and liquidity crunch. Effects were as sudden as they were severe.
This “double whammy” from both export loss and large capital outflows drastically weakened its external payments position. In 2008, Korea recorded its first current as well as capital account deficits since the 1997/98 crisis.
Collapse of global demand reduced exports by 12% in the fourth quarter of 2008, despite the sharp depreciation in the won in 2008. However, imports also declined reflecting weakened manufacturing output which fell by 12%. Poor business sentiment led to a 16% fall in private investment. Private consumption declined by 5%. As a result, GDP recorded a negative 5.6% in the fourth quarter of 2008.
The devastating impact was centred on financial markets, with capital flows dripping in red. In 2008, foreign exchange outflows totalled US$55bil, comprising both FDIs and portfolio outlays.
Sharp de-leveraging prompted domestic businesses to borrow massively short term; by end-2008 short-term foreign debt rose to the equivalent of 97% of national reserves. This mismatch of long-foreign assets and short-liabilities remains until today a source of concern.
These simply meant tightening domestic financial conditions, considering that in 2008 the stock index (KOSP1) fell 41%, loan-deposit ratio rose to 135%, and bank profits declined by 47%.
The severe credit crunch reflected the 50% depreciation of the won from early 2008 to the fourth quarter of 2009. Overall, Korea’s balance of payments looked awful: Current deficit of US$6bil and capital account US$51bil.
As a result, Korea’s national foreign reserves fell by US$57bil to just over US$200bil at end-2008. That’s a far cry from a position of persistent surpluses since 1998 (reserves at end-1997 being only 10% of 2008).
Policy responseLike its Asian neighbours, Korea had learnt well from prior experience in successfully handling crises. More important, it had previously credibly reformed and restructured the economy. It was better placed than most in terms of technological infrastructure, to effectively deal with what came along.
The policy mix adopted this time comprised four rather traditional thrusts:
·Expansive monetary policy to ease liquidity crunch, including very low interest rates and accommodative quantitative measures (including purchase of long-dated assets);
·Aggressive expansionary fiscal policy to raise domestic demand directly, with tax reductions and front-loading large spending;
·Ready access to substantial official financing, and guarantees to relieve pressure on exchange rate and other asset prices, especially in stabilising forex markets (using new swap arrangements with the US, Japan and China); and
·Strengthening restructure and reform mechanisms to reduce inefficiencies in debt work-outs, bank recapitalisation, and SME credit support.
These measures are still on-going. Since the crisis, this mix of policies has worked reasonably well, with intended objectives being increasingly met.
The banking system appears to have stabilised with most indicators looking sound enough. Improvements are visible in bank asset quality and SME support looks solid with low NPL ratios.
True, the forex market continues to be of concern, but measures to address uncertainties are working sufficiently. Others like direct forex liquidity provision (US$55bil), government guarantees to banks (US$100bil), currency swap lines with three majors (US$90bil, with usage already repaid) and the Chiang Mai Initiative (reserve pool of US$120bil) have proved adequate to help calm markets.
Short-term foreign debt has slowly declined (now below US$150bil) as has the foreign debt ratio (39% of GDP).
On the fiscal side, economic stimulus spending since 2008 reached 5% of GDP by end-2009, with the three-year total for 2008-2010 at 7%. This was made possible because of its solid fiscal position until 2008 – with a public debt of 36% of GDP (lowest in OECD, average being 72.5%).
Korea post-crisis, 2009/10It now appears Korea’s policy responses have had most of the desired effects. Financial markets are certainly more stable.
However, forex markets are still not yet calm enough, with continuing currency maturity mismatches which need time to unravel.
Nevertheless, the overall situation remains vulnerable. Korea still does not have a completely convertible currency even though its exchange rate is market-determined.
Its recent experience showed off vast volatility in the won, which impact cuts both ways. Certainly, the sharp depreciation since mid-2008 helped boost exports in 2009. But the speculative massive capital movements inflicted high costs on the nation’s finances.
Overall, the economy is in recovery – a V-shaped one at that. GDP expanded 6% in the fourth quarter of 2009 (-5.6% in the fourth quarter of 2008). Latest forecasts point to a 4.5%-5.5% growth this year.
Between February 2009 and January 2010, the KOSPI was up 51%, the won appreciated by 24% against the US dollar, consumer prices were down 25%, BIS capital ratio of banks up 15% and currency reserves up 36% to US$273bil, even higher than the previous peak at end-2007.
Exports are doing particularly well, up 19% in 2009. It’s significant that Korea’s export markets have become more diversified (China now accounts for 24% of total trade; Asean 19%); so have the product-mix (semi-conductors 8% of total; autos and parts 11%; flat TV panels 5%; ship-building 10%).
Korea’s share of global LCD market is now 50%; and autos close on 15%. Koreans have done rather well for themselves.
Nothing is over-optimisticAs you get familiar with Koreans – academics, policy-makers, businessmen and consumers – you know they know they have come a long way. Indeed, they have successfully evolved from passive followers to becoming active agenda setters. This role befits a country on the move: From destruction in the 1950-53 Korean War to be one of Asia’s richest nations.
With per capita income now above US$20,000 a year (China, US$3,300 and Asia US$4,000), it’s within earshot of its former colonial master. But it has a much healthier economy than Japan and growing much faster to be merely catching up.
For Koreans, “nothing is over-optimistic,” notes an observer. Global brands acknowledge how quickly Korean names have risen.
They are already well-known for innovativeness and efficiency in electronics, cars, LCD display panels and ships, and are rising rapidly in building high-speed railways and atomic power plants.
But new successes will not come easily. Its economic model needs to be regularly updated to boost productivity and develop a more competitive service industry to move rapidly up the value chain.
Otherwise, they will be squeezed by low-cost producers from China, India and others in Asia, and out-innovated by the likes of the US, Japan and Germany.
Under pressure on costs, Korea knows it has to move into more advanced areas like clean energy technology, including wind-tunnels and hybrid electric cars.
It is making strides in low-carbon industries (already commands one-fifth of global lithium battery production). Its well-developed technological infrastructure is a plus.
Overseas, Korea’s top brands are making new breakthroughs. Samsung (the largest of Korea’s 60 biggest business groups) already outsells Hewlett-Packard in electronics.
According to a recent report, Samsung is on track to make more profits in 2010 than the top 15 Japanese electronic firms combined. Similarly, Korean autos already have 8% of the US market. Given Toyota’s predicament, Hyundai cars may well make further significant strides.
Korea still has a way to go. It has not yet arrived. But the Korean spirit is no longer just one of catch-up. Its enterprises have demonstrated with increasing frequency a determination to compete almost anywhere and with almost anyone. They deserve the credit of always trying harder.
WHAT ARE WE TO DO? By TAN SRI LIN SEE-YAN ·
Former banker Dr Lin is a Harvard-educated economist and a British Chartered Scientist who now spends time teaching and promoting the public interest. Feedback is most welcome at
starbizweek@thestar.com.my.
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