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Parallel thinking

19 December 2011 By Wayne Arnold

Kim Jong-il’s death has little obvious economic impact for South Korea, but don’t expect Seoul to portray it that way. Renewed uncertainty north of the border gives worried southern politicians ammunition for the kind of domestic economic stimulus that helps older homeowners and domestic manufacturers.

The Dear Leader’s demise dredges recollections of Cold War collectivism that did so much to spur South Korea’s export-led model of economic development. In fact, Cold War angst is now much diluted in the south. It is entirely alien to younger Koreans, whose worries about rising prices and dwindling job prospects pose much bigger political challenges ahead of presidential elections next year. Younger Koreans see the north not as an estranged sibling, but as a troubled cousin best kept at arm’s length.

Exports were key to building a strong democratic bulwark south of the 38th parallel. But the export engine is running out gas. Automation reduces manufacturing jobs and factory workers’ children desire a future beyond the assembly line anyway. South Korea’s official unemployment rate is below 3.5 percent, but one in five in their 20s is jobless. To absorb them, Korea needs to promote its services sector.

Korea’s weak currency aids exports but creates chronic inflation. Real interest rates are negative – which helps older homeowners who owe the bulk of Korea’s household debt, now equivalent to 150 percent of the average disposable income. It also helps politically powerful exporters. But economic dissatisfaction led to a generational uprising in elections for Seoul’s mayor Oct. 26. Buoyed by younger voters, an independent candidate trounced rivals from the two main political parties, including the conservative Grand National Party of President Lee Myung-bak.

The GNP responded by re-appointing the daughter of authoritarian former president Park Chung-hee as its head. Armed with the spectre of North Korean unpredictability and flagging global growth, the government is likely to reach for conventional tools such as lower interest rates and fiscal stimulus that bolster their base. These measures will weaken the currency, boost exports and stimulate manufacturing investment. Whether younger voters will swallow the cost as a price to be paid for new uncertainties in Pyongyang, however, is another matter.

 

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