South Korea relies 70% of its GDP to the international trade. To export high-end consumer electronics, the Korean economy needs to import raw materials and machineries. While the depreciation of the Korean won against the US dollar may spell for bonanza for Korean exporters, it does not necessarily bring a good news to the economy in general, since the prices of imports are on the rise and significant reduction of the imports are unlikely. South Korea has become very much dependent on oil and people"s consumption habit is not mindful of energy efficiency. When war threatens the stable supply of oil, the economy would be set to go to the dark tunnel.
All the more, depreciation of the Korean won means that the payment of the foreign debt is getting expensive. Although it may not give rise to something like the second financial crisis, it may take sometime to restore the business confidence. The on-going war in Iraq is making the soft-landing of the South Korean economy more difficult. Prior to the war, the South Korean economy was in the recession. Stock market was sluggish. Consumer confidence was low. So far, the new government of Roh failed to show any grand strategy in dealing with the North Korean nuclear issue. Disillusioned foreign business are either leaving South Korea or putting their investment decision on hold.
Then, what should be done for South Korea in the midst of the war? Isolation like North Korea or Cuba is not alternative. Less integration like imposing trade and investment barriers may be tempting to some politicians whose ears are taken by activists. Unfortunately to them, international trade and investment is a two-way street. We cannot keep selling our products to the foreign markets, without allowing them to sell their products in our market.
South Korea"s ties to the outside world are hard to disconnect. Denying such an interconnection is counterfactual. Foreign investment in the Korean stock market is quite substantial. Some major insolvent Korean companies look to the foreign ownership and control as a viable option. Emotional denouncing of foreigners may earn a few political coverage, but suffer economic consequences.
The case of Argentina would be illuminating for those self-proclaimed reformers. A century ago, Argentina was at the doorstep of the affluent society. The country had a plenty of resources. Its economy was booming. The advent of new maritime transportation technology ensured them vast opportunity for profit. Now, a century later, the country discovered itself not at the rank of the advanced countries, but further backward than a century ago: average living standard suffered a significant setback. Populism and anti-capitalistic leftist policy under the name of reform filled the Argentina politics.
While most of the Korean economy is exposed to the market forces and to the gravity of competition, a few sector refuse to change: Korean politicians, and public sector and the Korean labor unions. As long as they play the rhetoric of anti-globalization and anti-war, on the grounds of the anti-US, the Korean economy is taking a step close to the repetition of Argentina.
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