In both diplomatic and economic terms, South Korea is in a tricky place
Seoul is used to receiving all kinds of insults from its Northern neighbour. But recently Pyongyang’s generosity took the form of an unusual parcel: cigarette butts. Hundreds of used fags rained on South Korea last week as balloons, sent across the borders, were detonated via timers. The payloads did not appear to conceal anything hazardous, it was soon established: the trash was just trash. So Seoul refrained from using force to retaliate. Instead it counter-attacked by turning on walls of loudspeakers blasting homemade pop at the North.
Finding how to respond to Pyongyang’s latest provocation may prove more difficult. Last Sunday, just weeks after conducting its fifth nuclear test, North Korea fired a rocket into space. Because the weight of the object it carried weighted only 200kg – when functional satellites tend to weight at least 750kg – Western powers believe the launch was part of a plan to develop an intercontinental ballistic missile. The UN Security Council yesterday signalled its intention to stiffen sanctions against the rogue state.
Few expect the punishment to be harsh, however. China, North Korea’s only ally, doesn’t like the idea of a nuclear Pyongyang much more than the US or Japan. But it will probably veto any resolution calling for a dramatic step-up in sanctions, because it is loath of turning its worrisome neighbour into an enemy.
That leaves South Korea in a tricky spot. Facing a more urgent threat than Western peers – a North Korean warship made a brief incursion into South Korean waters on Monday morning – it must reassure its citizens by beefing up defences and demonstrating resolve. Yet with no help from Beijing, its only option is to seek a rapprochement with America – a move that is sure to complicate its recent attempts at cementing links with China. Seoul’s announcement yesterday that it would request the deployment of a US missile shield on its territory drew loud protests from Beijing.
The move could make waves on the economic front as well: China is South Korea’s biggest trading partner. And that may matter even more: while many investors reckon the impact of sabre-rattling with Pyongyang will be short-lived, there are worries that Seoul has now entered a secular economic slump that has no easy remedy. South Korea’s GDP only grew 2.6 percent last year, its lowest expansion in three years, while exports fell from the 13th month in a row in January. Korean stocks have lost 2.2 percent so far this year. The currency is down 2.1 percent against the dollar.
These are external causes to these wobbles: the Chinese slowdown and sluggish global trade are taking their toll on South Korea’s export-focused economy. But investors see more long-lasting roots to the malaise. The nation’s biggest manufacturers, they reckon, are squeezed between low-cost China and cash-rich Japan. The dominance of giant conglomerates in the domestic market, they add, continues to stymies competition. Governance issues at blue-chip companies and feeble dividends have dampened foreign investment; South Korea’s rigid job market has discouraged risk-taking and start-up creation.
The government’s response to the threat is not fully adequate. Last week Seoul pledged about $5 billion in fresh public spending to prop up the economy, along with tax cuts and cheap loans to local companies. That may help support domestic consumption and boost construction. But with global trade unlikely to perk up soon, and other Asian currencies at rock-bottom levels, the stimulus’ effects on exports may be muted.
Seoul is also seeking to reclassify South Korea as a developed market in global stock indexes. The move, it believes, would insulate the country from capital flight at a time when investors are fleeing emerging countries. But analysts are divided over the idea: as the second-most important country in MSCI’s emerging market index – representing about 15 percent of the total – South Korea is a must-have for most investors retaining emerging market exposure. Institutions will feel less compelled to hold South Korean stocks once these account for a mere 1.5 percent of the wealthy countries benchmark.
South Korea is far from running on empty. It has suffered less than most emerging peers, partly because local pension funds, which have serious financial heft, are for now keeping their cash in the country. It also counts among the world’s most innovative economies, even if institutional barriers prevent many ideas from becoming corporate successes. On both the economic and diplomatic front, creative solutions is indeed what South Korea needs – anything short of bold risks leaving it off balance once the music stops.