Friday, July 20, 2012

Between Giants: South Korea and the U.S.-China Rivalry

http://www.theatlantic.com/international/archive/2012/07/between-giants-south-korea-and-the-us-china-rivalry/260060/

By Jennifer Lind

An American ally and a Chinese economic partner, South Korea is trying to hedge between two great powers as they compete for influence.

SK nationalists.jpg
South Korean conservatives protest the North Korean shelling of Yeonpyeong island in late 2010. (AP)

After a decade of preoccupation with the Middle East, the United States is turning its attention toward Asia. As Washington refocuses on managing a rising China, in part by strengthening its ties with a network of Asian countries, it's discovering that at least one of its principal allies in the region may not be as fully on board as hoped. While the United States was toppling dictators and chasing terrorists, its South Korean ally has grown accustomed to a powerful China, and appears ambivalent about its role in America's plans for Asia. That's not to say that South Korea is about to evict the tens of thousands of American troops who still help deter North Korean aggression. But nor is the country apparently eager to participate in what many South Koreans see as a U.S. effort to contain China, whose rise has so far benefited their country in many ways. South Korean views are after all shaped by history: not only by the Japanese occupation, World War Two, and Korean War, but by hundreds of years of living as a small country surrounded by giants.

Recent cooperation between Japan and South Korea, the United States' two key regional allies, suggested promise for a nascent coalition. In June, all three held joint military exercises and Seoul and Tokyo negotiated an accord to facilitate intelligence sharing on North Korea's nuclear and ballistic missile programs. This agreement, called the General Security of Military Information Agreement (GSOMIA), would enhance America's ability to work with its two allies and represented, as political scientist Jeffrey Hornung wrote in the Japan Times, a "practical, forward-looking effort to strengthen relations between two vibrant democracies facing shared security challenges." Or it would have, at least, if it had ever been signed.

When South Korean President Lee Myung-bak's government announced the accord with Japan, politicians and civic groups protested. The agreement had been negotiated too quickly and secretly, they decried, demanding that it come before the National Assembly. In the heat of South Korea's election-year politics, politicians railed against security cooperation with Japan and lambasted Lee's government for selling out their country to Tokyo." The idea of offering our military intelligence to the Japanese Self-Defense Forces is utterly unreasonable," declared Democratic United Party spokesperson Kim Hyun in a statement, demanding an apology from President Lee. Two members of Lee's administration resigned, and opposition politicians have submitted a no-confidence vote calling for the prime minister's resignation. Lee's government shelved the accord.

Commentators largely blame the fracas on the lingering Japanese-South Korean tensions over historical and territorial disputes. Many Koreans resent Japan for not clearly acknowledging the atrocities it committed during its occupation of the Korean peninsula in the first half of the 20th century. Japanese leaders have at times issued apologies, but politicians and intellectuals on Japan's right still routinely deny well-established historical facts about the country's past human rights violations And Japan and South Korea both claim the same string of tiny islands -- known as Tokdo to Koreans, Takeshima to Japanese, and trouble to everyone else -- which have become a nationalist minefield for the two countries to traverse.

Still, there's something more behind the unraveling of the GSOMIA accord -- South Korean ambivalence about the country's role in the unfolding U.S.-China drama. Several defense and foreign policy analysts in Seoul told me, when I visited recently, that many of their countrymen shied away from GSOMIA because they saw it as part of a U.S.-led security architecture positioned against China. They added that many South Koreans are dismayed that, as they perceive it, the U.S. increasingly sees China as a military threat. A professor at the Korea National Defense University named Lee Byeong-Gu told me, "In particular, signing the GSOMIA agreement is worrying to Koreans in light of the recent U.S. 'pivot' or 'rebalancing' toward Asia, which many people fear represents an increased containment effort toward China. Some South Koreans are calling for their government to sign an intelligence-sharing agreement with Beijing as well as with Tokyo. South Korean legislator Shim Yoon-joe commented that signing such a pact with both Japan and China is important in order "to wipe out the allegation that the Korea-Japan military pact is a stepping stone to trilateral cooperation to check China."

South Korean analysts also emphasized to me that China is their country's top trading partner. As Aidan Foster-Carter put it, "South Korea can hardly afford to be seen as ganging up on the country whose growth largely drives its own." This year marks the tenth anniversary of the normalization of relations between South Korea and China. One researcher at a think tank in Seoul remarked to me that his institute has planned conferences and other events to commemorate the anniversary, and that South Korea's many other foreign policy institutes are all doing the same. At a time when the Americans appear to be orchestrating a coalition to balance against China, South Koreans are celebrating with it a milestone in productive and friendly relations.

Yet South Koreans are as wary of accommodating China as they are of containing it. Seoul resents Beijing's support for the North Korean regime. If North Koreans continue to kill South Koreans (as they did in 2010 in the attacks against the Cheonan frigate and Yongpyeong Island), Seoul may grow less tolerant of Beijing's sheltering of Pyongyang. Or increased Chinese belligerence in the South China Sea and East China Sea disputes may lead Seoul to decide that it needs allies to protect it from the behemoth in its backyard.

It's possible that Chinese policies could one day lead South Korea to edge closer to the U.S. and Japan, but that day has not yet come, and China may never even emerge as a security threat that requires the sort of balancing coalition that the U.S. seems to envision. As long as this ambiguity continues -- or as long as Washington tolerates its ally's coziness with Beijing -- South Korea's strategic position will likely push it strongly toward hedging. As such, Seoul will resist policies, like the agreement with Japan, that appear to situate it clearly on the side of one great power or another. ◦
Share/Bookmark

Tuesday, July 10, 2012

Matthews Asia report: The Ascent of South Korea

http://us.matthewsasia.com/perspectives-on-asia/asia-insight/default.fs

"Korea has been one of the few nations to consistently increase R&D spending in recent years while many other countries have cut back."


The Ascent of South Korea

July 2012
One country in Asia that seems to attract less attention than it might deserve, considering its modern-day achievements, is South Korea.

While index provider MSCI this year (once again) left South Korea classified as an “emerging market,” both FTSE and Standard & Poor’s have placed Korea in the “developed market” camp for several years now. In June, South Korea became the seventh nation in the world to become a member of the so-called “20-50 club”—a moniker referring to countries each having a population size over 50 million and national incomes exceeding US$20,000. Other nations in the club are the U.S., Japan, France, Italy, Germany and the United Kingdom, with the U.K. having joined most recently in 1996. But what makes Korea even more impressive is just how far it has risen in a relatively short span of time. In 1960, the year following the end of the Korean War, the nation was among the poorest in the world, and its GDP per capita was comparable to some of the most impoverished areas of Africa. This economic progress has come in combination with Korea’s democratic trajectory. Now among Asia’s most democratic countries—on par with Japan—Korea’s political system includes leftists and progressives within a broad ideological spectrum. What has propelled Korea to this status? Let us examine the forces we believe to be shaping its future as well as the challenges that lie ahead.


 Emphasis on Education and R&D

Among Korea’s chief attributes is its strong emphasis on education. Korean parents are known for the importance they stress on education. In fact, Korea’s private sector spending on education is the highest among Organization for Economic Co-Operation and Development (OECD) member countries. Even today, small town communities hold celebrations for local students who are admitted into prestigious universities. The achievement is considered an honor for the entire town, and educational pedigree is generally considered a greater status symbol in Korea than monetary wealth. There are more than 75,000 foreign students from Korea currently studying in U.S. universities—a high ratio considering Korea’s university age population. Many of the students also tend to rejoin Korea’s workforce, benefiting Korea’s transformation from an industrial nation to a more research and development-focused economy.

In 2010, Korea showed the third-highest ratio of research and development (R&D) spending to GDP among OECD countries, and outpaced both the U.S. and Japan in this area. In fact, Korea has been one of the few nations to consistently increase R&D spending in recent years while many other countries have cut back. Even amid the recent global financial crisis, Korea increased its R&D spending. Accordingly, product quality among Korean auto and electronics makers has noticeably been on the rise.



Globally Competitive Companies

In many product categories—from semiconductors to shipbuilding—Korea now boasts a dominant market share. Its auto industry has also been making impressive and steady gains that have resulted not only from competitive pricing but also from improved brand image and product quality. This year, despite offering fewer incentives than the industry average in the U.S., Korean auto companies still continued to gain market share. One Korean automaker was also ranked highest among all automakers in the U.S., according to a recent consumer survey and has been honored with several automotive accolades in the past few years. Not bad for a company that didn’t start making its own branded cars until 1975—about seven decades after Ford introduced the Model-T and about 40 years after Toyota’s first car. Considering Korea’s recent free trade agreement with the U.S., Korean companies should be able to increasingly tap into the large U.S. consumer market.

The Road Ahead

Korea’s strides in branding and R&D, coupled with a well-educated and Internet-savvy workforce (it now has one of the highest penetration rates of broadband and smartphone users), no doubt have helped to maintain its low unemployment rate, which was 3.2% in May. After Korea was hit, like many other countries, by the recent global financial crisis, it demonstrated notable resilience with its quick recovery.

Still, Korea’s growth is not without hurdles. Concerns include its quickly aging population and a birth rate that has been on the decline since the 1970s. Government officials have been trying to reverse this trend with measures to increase the participation of women in the workforce, create easier access to childcare, better work and social benefits and more affordable education. Another measure taken to address labor shortage issues was the reform of its foreign worker policy. The government introduced an Employment Permit System (EPS) in 2004 to manage foreign workers in a more systematic way while also improving the basic rights of foreign workers. Between 2006 and 2010, Korea had a net influx of 283,000 foreign workers. Fortunately, Korea’s growth in labor productivity has been one of the fastest among OECD members, allowing it to produce more goods and services with the same levels of labor.

It is difficult to explore Korea’s economic ascent without a discussion over its system of chaebols—large, often family-controlled conglomerates. Korean chaebol companies represent both the economy’s successes and challenges. On one hand, concentrating domestic economic power within a few chaebols has enabled Korea to compete internationally, driving growth as most chaebols have done exceptionally well in overseas markets. However, this concentration of power can also leave Korea vulnerable. The fall of one chaebol company could have significant and wide-reaching social, political and economic consequences. For example, the infamous collapse of one conglomerate in 1999, in the aftermath of the Asian Financial Crisis, forced a wave of closures and impacted jobs in several countries.

Many argue that Korea needs to cultivate a stronger small and medium-enterprise (SME) sector to better weather economic downturns. Fortunately, there are encouraging signs as we see an increasing number of smaller firms making inroads in areas such as consumer-related industries, particularly in China. In addition, Korea has seen its so-called “soft goods”—Internet services, pop music and television dramas—enjoy new popularity. These industries are primarily led by entrepreneurs, rather than chaebol-related firms.

Relationship with North Korea

Another long-term challenge continues to be South Korea’s relationship with its Stalinist neighbor to the North. Since the Korean War ended in an armistice in 1953, North Korea has continued to threaten South Korea with periodic military provocations that have included artillery fire attacks. Each incident has led to short-term market volatility and we expect this to continue to be the case for the foreseeable future. North Korea is still undergoing a leadership transition since long-time leader Kim Jong Il died in 2011. His son, Kim Jong Un, is expected to lead the country; for the time being, little is known about him and North Korea remains a closed economy.

Should North Korea change it stance, however, there are great potential benefits to the Korean peninsula. On a basic level, North Korea could become a good source of the labor and natural resources that South Korea lacks. In turn, South Korea—could provide the technology and capital to help North Korea develop.

More to Come

Korea tends to be viewed with the same lens that investors use to consider Asia’s two largest economies—China and India. But that may be the wrong comparison. China and India are still considered emerging countries while Korea has already gained developed country status. When compared to other developed nations, Korea’s growth profile stands out. Among developed nations, Korea had the third-highest GDP growth rate in 2011, trailing Israel and Sweden. In 2012, based on the OECD’s forecast, Korea is expected to be the fastest-growing developed country. Despite its growth over the past few decades, however, Korea’s GDP per capita is still just about half that of Japan, indicating room for further expansion.

Not only is Korea’s growth rate positive, it is also now more transparent. Last year, Korea became one of the first countries in the region to adopt International Financial Reporting Standards, which require companies with assets of more than 2 trillion won (US$1.7 billion) to make financial statements easier and more transparent for foreign investors to access. SMEs are expected to be required to adopt these standards by next year. Since the 1997-98 Asian Financial Crisis, Korea has also undergone significant corporate governance reforms. The introduction of outside directors is a major feature of the changes to board regulations, and enhances a board’s monitoring functions. Holding companies have simplified their shareholding structures and other measures have increased management accountability, protecting minority shareholder rights and information disclosure.



What I find most encouraging about Korea is its legacy of resiliency. If Korea can continue on a path of innovation and transparency, it should be able reach the next GDP milestone of US$30,000 GDP per capita. It took Japan five years to reach that target after joining the “20-50 club” and nine years for the U.S. Only time will tell when Korea will surpass such targets, and we will continue to keep a close watch.

Michael Oh, CFA
Portfolio Manager
Matthews International Capital Management, LLC ◦
Share/Bookmark