South Korea: Headwinds and Crosswinds

South Korea today faces economic and political headwinds as strong as any country in Asia, with faltering domestic consumption and struggling exports in the face of slowing Chinese demand from Korea’s formidable export machine. Abenomics’ latest tactics to weaken the yen are giving Seoul’s export sector even more problems.

The government, headed by Park Guen-hye, is pushing fiscal solutions to shore up its small and medium enterprises and households, while – as governments have in the past—pushing the chaebol to part with their cash hoard to increase fixed-asset spending.

Arrayed against these problems is a formidable social ethic that in the 1997-1998 Asian Financial Crisis impelled houstyi6twives to turn their gold over to the government to ameliorate the problems.

More broadly, South Korea remains a strong competitor in the face of these headwinds. Its soft power is quirky but catching. An astonishing 2 billion views have been downloaded from YouTube of the catchy worldwide hit “Gangnam Style” which appears to have been listened to by a rather large chunk of humanity.

Pop culture and geopolitics don’t often go together, but the irreverent, slightly absurd song's spread across borders via the Internet is emblematic of some of the dynamics of globalization today, and particularly South Korea's. The country’s solid indigenous K-pop industry not only dominates the country's own music charts – in a world in which many countries' pop scenes have become overwhelmed by foreign and especially Anglo-American imports – but has growing appeal overseas. It has been consciously promoted by the government as part of Korean “soft power.”

Countries across the world today face the threats and opportunities of globalization. South Korea’s export-oriented economy, in which exports amount to more than 55 percent of gross national product, is particularly vulnerable to international trade winds. But South Korea, a mid-sized country of 50 million people with an ancient culture, provides an interesting example of how a strong, but limited, state can help a country manage the flows of globalization and be competitive.

This is particularly the case in comparison with neighbor North Korea, which has almost entirely closed itself off from the world and is languishing under Communist tyranny and misrule. The South Korean case however also shows some of the risks of national oligarchy and over-centralization.

Having learned from the experience of the 1997-1998 Asian financial crisis, South Korea took an unorthodox approach in reaction to the 2008 global financial crisis, quite at odds with the traditional advice of bodies like the International Money Fund.

As the Bertelsmann Stiftung’s Transformation Index (BTI) notes:“The country followed pragmatic macroeconomic policies in combating the effects of crisis, including the OECD’s largest fiscal stimulus package, low interest rates and a competitive exchange rate. The government and the central bank have shown little reluctance to use controversial measures such as exchange rate intervention (“managed floating”) and capital controls to protect the country from being damaged by volatile international markets.” South Korean banks had little involvement in “dubious and unregulated financial products” and none of these banks failed during the crisis.

While the country has taken a proactive approach to stemming the damage from Western and international financial chaos, South Korea is by no means economically closed, having negotiated free trade agreements with the European Union and the United States. Negotiations with China and Japan, two nearby countries with which relations are sometimes tense, are underway.

The South Korean real economy, unlike that of many developed economies, benefits from a strong and competitive manufacturing base. The country's research and development (R&D) spending is among the highest in the world at 4.04 percent of GDP in 2011.

South Korea has made environmental sustainability, that most long-term and global of issues, a national priority and has become the home of the Global Green Growth Institute. This has however also included more controversial projects such as expansion of nuclear energy and the construction of huge dams.

More generally, as the BTI report notes: “Strategic planning remains an important factor in South Korean governance.” But a strong central state does not necessarily mean big government, as taxes absorb just around 14 percent of GDP, low compared to many European or North American countries.

Media in South Korea is only “partly free”

However, the very factors that make for South Korea's strengths – a strong central government and powerful industries – also cause certain weaknesses. Big business conglomerates, known as chaebol, continue to dominate the economy and have become even more concentrated in recent years. The resulting monopolies and oligopolies often mean higher prices for consumers.

Counter-powers to the government are weak. Local and provincial governments have relatively little power, often depending on the center for financing. Trade unions have been declining with the rate of unionized workers falling to just 9.9 percent in 2011. Many workers have precarious working conditions and stagnant wages.

South Korean newspapers tend to be conservative and there have been complaints about government intervention in TV and radio. The country's National Security Law (NSL) allows for the formal blocking of electoral candidates deemed pro-North Korean and has led to self-censorship in the media. The NSL also applies to online media. Freedom House demoted South Korea's media environment from “free” to “partly free” in 2011.

At the same time, South Koreans have also been able to enjoy the liberating trends of recent years in the form of the spread of the Internet and civil society. Media bias and censorship are becoming less relevant as the country has become an extremely active online society with quasi-universal Internet access. Civil society groups have expanded in number in recent years representing all manner of religious, social, political and economic interests.

South Korea then shows how globalization can be an opportunity when paired with a government capable of checking negative international trends and tapping into positive ones. The nation is not merely “subjected” to the forces of globalization, but through intelligent public action, influences them.

Craig James Willy is an EU affairs expert. His French-English blog is available here.