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South Korea is a small country with great potential that is sandwiched between economic giants Japan, China and Russia and that has North Korea as a nervous and seemingly unreliable neighbour. Korean reunification, which is impossible to predict but possible to implement, provided that China wants it, would give South Korea alongside China and Japan a strategically important economic position in the north-eastern corner of Asia. South Koreas single-mindedness and tactics for becoming a major global economic player are impressive. Meanwhile the economy needs rebalancing in order to become less export-dependent. Perhaps the countrys foremost asset is a well-educated labour force, with a strong work ethic. But structural factors and inflexibilities hamper its long- and short-term potential: for example labour market rigidities, an ageing population, falling trend growth and an inadequate small-business sector. Today the undervalued Korean won is propping up exports in a way that is inconsistent with long-term global rebalancing and with Group of 20 (G20) membership. But dont count out South Korea.
of the cease-fire in the Korean War of 1950-53, a war that is thus not yet over. But geographically and historically, South Korea and North Korea are forever united. The question is: When will reunification come? The history of Korea goes back more than 4,000 years in time. This is a country where advanced age is respected and is very important in creating confidence and gaining th credibility. In area, South Korea is the 109 largest country in the world, with a population of nearly 50 million people; more than 80 per cent live in cities and some 10 million in the capital, Seoul. South Korea has demonstrated fantastic and impressive th growth in the past 40 years. It is the worlds 13 largest economy (2011) and thus a natural member of the G20. The country has built a high-tech industrialised economy that is well-integrated today into the global system. As its economic strength increases, South Koreas self-confidence is also growing, which is increasingly visible in various contexts. South Korea has acted very deliberately and strategically to attract global attention by marketing itself in connection with international events. The 1988 Summer Olympics, the 2002 football World Cup (co-hosted with Japan), the presidency of the G20 in 2010 and the coming 2018 Winter Olympics in Pyeongchang all aim at confirming South Koreas new position in the world and its economic success. The future looks bright for South Korea, but there is no shortage of challenges. A travel report South Korea
Some 50 corporate chief executives participated in SEBs 2012 Nordic Business Delegation. During a few intensive days on location in Seoul, the CEO group and SEB top managers heard stimulating lectures about South Korea, gained historical insights, took part in discussions and visited the Demilitarised Zone and the border between North and South Korea. This report summarises major conclusions from the conference and provides subjective reflections about the state of things in and around South Korea. The report is based on different types of information, for example from representatives of the political sphere and of the private and public sectors as well as various international reports. 1
This report is produced by Skandinaviska Enskilda Banken AB (publ) for institutional investors only. Information and opinions contained within this document are given in good faith and are based on sources believed to be reliable, we do not represent that they are accurate or complete. No liability is accepted for any direct or consequential loss resulting from reliance on this document Changes may be made to opinions or information contained herein without notice. Any US person wishing to obtain further information about this report should contact the New York branch of the Bank which has distributed this report in the US. Skandinaviska Enskilda Banken AB (publ) is a member of London Stock Exchange. It is regulated by the Securities and Futures Authority for the conduct of investment business in the UK.
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Some observers express hopes that Kim Jong-Il, who died in December 2011, will prove to be a 17-year parenthesis albeit a very tragic one in North Koreas development and the countrys relations with the world at large. Most of them have been positively surprised that so far the transition to the new leader, Kim Jong-Un, has gone smoothly. Many are hoping that he will follow in his grandfather Kim Il-Sungs footsteps rather than his fathers. During Kim Il-Sungs era, North Korea took certain initiatives that in spite of everything represented positive developments and closer relations with other countries. Today China plays an almost indispensable role in ensuring the stability of the Korean peninsula. In the past two decades, relations between China and South Korea have greatly improved. Meanwhile Russias role is limited, since that country is not regarded as having enough energy or capacity to get involved in Asian affairs. Unless China chooses to help bring about change, it is unlikely that any other country will challenge and pressure the North Korean regime to cooperate. The China-North Korea axis rests on three legs: that there is a deep relationship between the Communist parties in the two countries, that China has the longest land border with North Korea (1,420 km) and that China wishes and will do everything in its power to keep the Pyongyang regime stable to avoid jeopardising Chinese economic growth. To China, the relationship with North Korea must be viewed as an asset, not a burden, if support to North Korea is to continue. But despite their good relations, Beijing does not control Pyongyangs nuclear development programme. The international summit on nuclear security in Seoul in late March took place as North Korea was planning to launch a long-range rocket with the potential to carry nuclear th weapons. The launch was set for April 15, the 100 anniversary of Kim Il-Sungs birth. At this writing, the rocket had not yet been launched. Chinas impressive economic development is a stabilising influence not only for North Korea but also South Korea. A weak South Korea would greatly worsen the geopolitical situation in the region. A desirable and realistic scenario for North Korea is a gradual adjustment, including reforms and greater openness to other countries, i.e. a reprise of South Koreas development from an initially authoritarian regime. The idea is that ultimately, these changes will have progressed so far that it will be a natural step to
North Korea wish to achieve with its occasionally unpredictable actions? To create serious crisis situations or to reach international agreements and get help? One cautious and perhaps daring conclusion is
that the risks posed by North Korea are exaggerated. South Korea
Size (km2) Population (millions) Population increase (%) Life expectancy (years) GDP per capita (USD GDP (PPP, USD billion) Land borders with 99,720 48.9 0.2 79.3 31,700 1,554 North Korea (240 km)
North Korea
120,538 24.6 0.5 69.2 1,800 40 China (1,420 km), South Korea (240 km), Russia (20 km) 2,500 China (46.5%), South Korea (40.8%), Bangladesh (1.4%) China (64.5%), South Korea (24.6%), Russia (2.4%)
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reunify North Korea and South Korea. Such a gentle collapse would be orchestrated by a number of involved parties. The issue of reunifying the two Koreas is constantly present. There are divergent accounts about how far the preparations may have progressed. While some observers maintain there are no plans for removing the border between the two countries, official statements indicate that South Korea is now prepared to build up a reunification fund equivalent to USD 50 billion that would be used to support the development of a future reunited Korea. Reunification represents enormous economic (as well as social, political and democratic) potential, not only for North Korea but for the entire region. The economic dimension is all about gaining access to North Koreas labour force and natural resources. Today North Korea is a bottleneck preventing stronger economic growth. It is thus in the interest of various countries China, the United States, South Korea, Japan and Russia to ensure that the transition will be stable and smooth. These countries should have a very large interest in investing together in North Korea to bring about the desired development and growing Asian potential.
largest oil importers, and around 10 per cent of oil imports come from Iran) and various weaknesses in the construction sector. In the IMFs assessment, South Koreas financial system is well-capitalised and can deal with challenges. One weakness, however, is found in the countrys small mutual savings banks (MSBs), and this has created concern among depositors. However, the size of these banks is not enough to enable them to pose a systemic risk. The long-term challenges facing South Korea are not significantly different from those found in other countries: an ageing population (with no clear action plan at present), gradually declining potential growth and long-term energy supply (making larger investments in nuclear power likely). South Korea will have difficulty competing with China in terms of cost and volume, increasing pressure on the country to try to climb higher in the value chain and focus more on the service sector. Another weakness is an insufficiently developed small business sector. It is both impressive and a little scary that a company like Samsung accounts for 22 per cent of South Koreas economy, 20 per cent of its exports and 12 per cent of its tax revenue. The Asian financial crisis of 1997/98 exposed some of the weaknesses of the South Korean economic model. During a short period, the country had built up high household indebtedness, while its dependence on short-term foreign currency borrowing had increased. GDP fell at most by 7 per cent but turned around very quickly, among other things because the Korean won fell 30 per cent in value against the US dollar and other major currencies (at times its depreciation was more than 50 per cent). Perhaps one of South Koreas most valuable assets is its labour force. The educational level is among the worlds highest, and people work long days. But there are challenges as well. Female labour market participation is at too low a level, and companies are experiencing matching problems between available skills and what they really need. This may help explain why productivity has become undesirably low. The slow population increase, 0.2 per cent a year, is a challenge to the country and its long-term economic growth. The won has served well as a stabilising force, both during the Asian financial crisis and the latest global recession. The weakening of the won against the US dollar
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during the 2008/09 global recession was almost as large as a decade or so earlier. Economists and politicians are reluctant to admit the role of the won (its weakness) in South Koreas economic growth, but it is obvious that this has played an important role in the success of the export sector. The central banks foreign currency reserve of USD 320 billion is the worlds eighth largest, and it is trending higher. Given a current account deficit of USD 22 billion (2-3 per cent of GDP), most indications are that the won is undervalued today. Looking ahead, this will pose a challenge to the export industry when the won appreciates and ends up closer to its long-term equilibrium level. But given South Koreas currency policy today (an undervalued currency and regular interventions in the foreign exchange market), combined with Chinas strategy of letting the yuan (renminbi) appreciate against the dollar, South Korean exporters will benefit. This will increase the risk of protectionism and criticism from other countries. South Korea: FX reserves & USD/KRW
December). The political system resembles that of France; the president has more real power than the prime minister, currently Kim Hwang-sik. The main focus will thus be on the December election. President Lees 747 plan has provided the basis of South Koreas economic policies: 7 per cent growth, achieving GDP of 40,000 dollars per capita (today th 32,000) and making South Korea the 7 largest economy th in the world (13 today). There is some political risk, since it is unclear who may succeed Lee and what policies will be pursued. Nor is what candidates say in an election campaign usually the policy they implement when in office. There is nevertheless hope that public policy will continue to emphasise measures that benefit industry.
USD (billions)
USD/KRW
Final words
Like so many other countries in the world, South Korea too must operate in a partly new globalised environment amid strong competition. The country possesses an adaptability that is confirmed by the impressive
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economic journey it has traversed in recent decades. The United Kingdom needed 155 years to double its GDP per capita. It has taken South Korea 10 years to complete the same economic journey (China 14 years, Japan 33 years, the United States 53 years and Germany 64 years). South Koreas single-mindedness and economy policy strategy are impressive to an outside observer and are probably not connected to changes in the political system. And South Korea is continuing to sign free trade agreements with countries and regions around the world. North Koreas unpredictability is an inhibiting factor in South Koreas development, but looking ahead there is potential for possible Korean unification. Yet South Korea faces challenges that cannot be ignored. Relying on an undervalued currency is not a sustainable longterm strategy. South Korea (hopefully unified with its northern neighbour), China and Japan form an Asian trinity of nations that is a force for the rest of the world to reckon with. Robert Bergqvist +46 70 445 1404