Here's why South Korea's growth is a casualty of its political impasse

By Daniel Moss

  South Korea really ought to be doing better. Inflation is easing nicely and, as a major exporter, the nation stood to benefit from an upswing in global growth. The American economy is outperforming, and China has taken some important steps to put a floor under its subpar expansion. 

Politics is getting in the way, a reminder that big economies don’t just run themselves. The protracted political stalemate that began with President Yoon Suk Yeol’s short-lived imposition of martial law last month has sapped confidence at precisely the wrong time. Prosecutors charged the impeached Yoon with insurrection, Yonhap News reported, forcing him to remain in detention. (The finance minister currently heads the government.) This fiasco, in a country famed for stability, is bleeding into the economic arena.

 

Unemployment jumped a full percentage point in December, which is a lot for an advanced industrial nation. Gross domestic product barely rose in the final three months of 2024. Sure, interest rates are coming down and there’s reason to hope that if Yoon is removed from office and a successor emerges, business life can get back on track.  

But this was the crucial moment Korea could have built some resilience. The central bank was already worried about the implications of Donald Trump’s return when it cut rates in November, fearing that Republican supremacy would embolden Trump, who ranks tariff as his favorite word. Korea is vulnerable because of its large trade surplus with the US. It can hardly feel comforted that the tariff cudgel is being brandished for reasons that have little or nothing to do with trade. Trump announced levies on Colombia before pulling the threat after reaching a deal on the return of deported migrants. How long before Seoul appears on the Oval Office radar? 

 

Lower borrowing costs are important, but as Bank of Korea Governor Rhee Chang-yong has indicated, they are hardly sufficient. Fiscal policy has a big role to play, if the political class can muster the will. There are some encouraging signs: The acting president has hinted at a supplementary budget and a holiday has been earmarked with the aim of boosting consumption. This is a situation where it makes sense to try almost anything simply to demonstrate authority. “The government can be cautious about an extra budget given its existing debts and fiscal deficit, but it can have a reassuring effect for the public, signaling that the government is actually doing something for the economy and that it is in control,” Lee Seung-suk, a researcher at the Korea Economic Research Institute, told Bloomberg News last week. 

 

It wasn’t supposed to be this way. South Korea had a very strong start to 2024. Exports were surging, economic growth was exceeding forecasts and manufacturers were churning out the semiconductors that drive modern electronics and artificial intelligence. Household spending was recovering, and construction showed signs of picking up. At a time when investment appeared increasingly ring-fenced along the lines of national security concerns, Korea looked to be well positioned as a critical Washington ally. In May, I wrote that this was a boom that wasn’t getting the respect it deserved.

 

Too bad politicians don’t give the deflated boom enough attention today. The continued wrangling is clearly hurting companies and consumers. While the currency, the won, has had a respectable January, it’s down about 12 per cent over the past year. The situation is salvageable; advantages and technological prowess haven’t disappeared. But the country does need to move on from the Yoon saga. The scars will run deep, but they don’t have to impede economic progress any longer than necessary. Electoral and constitutional disputes don’t always hurt an economy, but it helps if things are traveling nicely when the setbacks occur. 

 

Politics and economics don’t always move on the same track. The drama of Bill Clinton’s second term — he was impeached — scarcely left a scratch on the US macro scene. Joblessness was low, inflation looked to be licked and budget surpluses, a rare beast, were projected. The whole saga was seen as theater, with Treasury Secretary Robert Rubin and Federal Reserve Chair Alan Greenspan steering the economy.  The situation in Seoul today is far more precarious. 

 

The good news is that Korea is resilient. Remember, at the peak of the Asian financial crisis in the late 1990s, citizens lined up to donate gold to convert into precious hard currency. The economy emerged stronger from that collapse. Conditions today are nowhere near as bad. There’s a lot to work with — all that’s required is the political will.

Disclaimer: This is a Bloomberg Opinion piece, and these are the personal opinions of the writer. They do not reflect the views of www.business-standard.com or the Business Standard newspaper