Can Korea bring Asia together?

President Lee Myung-bak, left, addresses questions from the press after a summit with China’s Premier Wen Jiabao, center, and Japanese Prime Minister Yukio Hatoyama in Beijing last year. [YONHAP]

For one thousand years or more, Korea’s greatest fear has been geographic. Squeezed between China, Japan and Russia, it has had reason to fear invasion or domination. The closest European equivalent is Italy, which was threatened for several centuries by neighboring Austria, France and Spain.

But since 1945, geography has turned to Italy’s advantage, providing at least its northern half with booming markets, sources of industrial and technological cooperation and wider scope for Italian influence. South Korea’s great opportunity is to do the same, turning geography from a fear into a source of hope. It won’t be easy. Neither history nor geopolitics seems likely to smooth the way. But the chance is there.

For a start, dozens of countries would dearly love to find themselves next door, as South Korea is, to the world’s second- and third-biggest economies. Japan is hugely rich, while China is developing rapidly. South Korea shares many elements of culture with these two giants and has the added advantage, in each case, of not being the other giant. The challenge for South Korea is to make itself flexible and skilled enough to grab this opportunity and keep hold of it, while showing enough diplomatic deftness to prevent politics from spoiling the party.

The economic basis to exploit this good geographical luck already exists: China has overtaken the United States as South Korea’s top trading partner. South Korean firms have done well in China and more than half a million South Korean citizens work or study in China already. In India, South Korean firms have prospered much more readily than have their Japanese competitors, having proven more adaptable to Indian conditions and management culture.

Seoul’s experience of the global economic crisis proved the linkage. Like China, South Korea suffered a double whammy. The country was hit first by an inflation scare in early 2008 and then by the second blow of the post-Lehman collapse in world trade. But now the rebound is happening faster than in the Western economies, as the loosening of monetary policies and injections of fiscal stimulus have had a quicker impact in Asia than the debt-laden West.

The political requirements to benefit from its geographic position, however, are much trickier. The bitter history of Korea’s colonial occupation by Japan from 1910 to 1945, and domination for even longer, continues to cast a dark shadow over the relationship. With China, Mao Zedong’s support for North Korea during the Korean War, and his successors’ support for the state since, is a source of mistrust. Disputes among Chinese and Korean scholars over the legitimacy of the current border between China and North Korea aggravate those suspicions, as do the recurrent arguments over the true historical origin of the Korean nation more than a millennium ago. More relevant, however, is the emerging rivalry between the three great powers of Asia, which threatens to marginalize middle-sized powers such as South Korea.

Economically, Asia - especially East Asia - has become much more deeply integrated into the global economy over the past 20 years. China’s emergence in the 1990s as a final-assembly hub for parts and components made elsewhere in the region, and as a big market for machinery and raw materials, drove this integration. Since the late 1990s, India has also begun to join in, though from a lower base, as its economy has become more open to trade and its domestic investment rate has soared.

Politically, however, the integration of Asia has hardly begun. China and India see each other as natural, long-term rivals, and short-term competitors for allies around the coast of the Indian Ocean and thus for access to ports, sea-lanes and pipeline routes. The pair fought a war in the Himalayas as recently as 1962 and still dispute vast areas of land. Japan and China are historical rivals, having fought from 1931 until 1945, but also see each other as competitors for markets and influence.

As a result of these rivalries, no real institutional framework has emerged in Asia to match that of the European Union or even of the North American Free Trade Agreement (Nafta). Each nation fears that the other might come to dominate it. Each would prefer to believe that its own leadership (or, at least, autonomy and sense of control) could be built outside any framework of pan-Asian agreements.

Asian political relationships therefore remain predominantly bilateral, or else are intermediated through subregional groupings such as the Association of Southeast Asian Nations (Asean). The summits of wider sets of countries are even denoted by reference to Asean, rather than to the big powers: they are called Asean Plus Three (the ten Asean members plus South Korea, China and Japan) or Asean Plus Six (those plus India, Australia and New Zealand). That last grouping, also known as the East Asia Summit, offers the greatest potential for emulation of the European Union, for it is the one entity that includes all three of Asia’s giant powers. But so far it has proved a shallow affair, with none of the members willing to take the initiative to deepen it.

That slow pace of development, amid reluctance on the part of China, India and Japan to take the lead, offers a starting point for defining South Korea’s potential future role. South Korea’s position as a midsized power in the heart of Asia can become a strength - above all in political terms, but also in economic and industrial terms.

South Korea should be taking the initiative in promoting the development and deepening of pan-Asian economic and political institutions. Why is such a development in South Korea’s clear interest? First, because conflict or even disruptive competition between the great powers of Asia would damage South Korea. It would be caught in the crossfire, as it has so often been in the past.

Second, such conflict or disruptive competition would close off, or at least constrict, South Korea’s own future economic opportunities, which lie most obviously in providing goods and services to its giant neighbors. Since the war, South Korea has grown primarily by providing goods to the world beyond Asia, in particular the United States. That option will still be there, but it is not likely to be enough, nor is the United States and the West likely to be a rapidly growing market.

With Asia, South Korea can prosper; without Asia, South Korea’s task would be much harder. To have Asia as the driver of its growth, South Korea needs open access to all the region’s markets, in both goods and services, as well as the ability for its companies to make direct investments all across the region.

In this, South Korea is again analogous to Italy in western Europe, or perhaps to Belgium and the Netherlands. When the European Union was first being constructed in the 1950s and 1960s, the prime requirement was a political willingness in the two leading western European powers, France and Germany, to replace conflict with cooperation. That willingness fundamentally came from within, but it was greatly encouraged by governments elsewhere and by individual statesmen: by the United States, from afar, but also by Belgium, the Netherlands and Italy (plus, of course, tiny Luxembourg), the other founding members of the European Union.

South Korea is already engaged in welcome, tripartite summitry with Japan and China. But it can and should do more. The annual East Asia Summit needs an injection of vigor, which can only come from specific policy initiatives from the member countries. A work program that stimulates real political pressure for progress is something that South Korea could provide.

To do so, it needs at least cooperative relationships with China, Japan and India. The biggest obstacle there is Japan. At a popular and cultural level, integration between the two countries is deep, with South Korean films, TV shows and music highly successful in Japan, and with a good history of student exchanges. But at the political level, relations have been fractious, hurt by historical memories and by niggling territorial disputes. Japan’s revolutionary general election of Aug. 30, 2009, offers a great opportunity to change those relations.

The old Japanese government, led for more than 50 years by the conservative Liberal Democratic Party, was too readily influenced or undermined by extreme nationalist and revisionist groups in its midst, especially over questions of Japan’s colonial history and the island disputes. The new government, in a Japanese parliament dominated by the center-left Democratic Party of Japan, has no such burden. It has come to power promising to try to advance Asian regionalism and to improve relations with Japan’s neighbors.

China is always going to resist being pushed around. But with a more cooperative Japan, and with the world economy in a depressed state amid much talk (and some action) about “rebalancing,” China needs a strong and open Asian market. During the next few years, China faces the challenge of revaluing its currency, or at least moving it gradually to full convertibility, thus becoming the last major economy to join the post-Bretton Woods currency regime. As that occurs, the relationship between the renminbi and other Asian currencies will become more and more important. And in that relationship lies a need and a chance to build stronger economic and political institutions.

A full Asian free-trade area, equivalent to the European single market, would be a fine work program - even conceding that it is one that will take decades to achieve. But an Asian monetary system, analogous to the European currency arrangements of the 1970s and 1980s, could be achieved much more quickly.

So far, the Asean countries have taken up much of the running in developing regional institutions, led in particular by Singapore. But their economies are small by comparison with China, India and Japan, and, with the exception of Singapore, their financial markets are underdeveloped. A push from Asia’s fourth-biggest economy - South Korea - would be far more influential.

To benefit from a deeper integration with Asia, South Korea needs a more flexible and open economy, especially in the service sector. Japan made the mistake in the 1970s and ‘80s of failing to recognize the implications of economic maturity - that it needed a more diverse set of sources of productivity growth and innovation. South Korea cannot afford to repeat that mistake.

From ‘Korea 2020’

28 essays on Korea’s future edited by McKinsey & Company, Inc.

Random House Korea, Inc.

A project with the International Advisory Council to the Korean President

*The writer is former editor of the Economist.

By Bill Emmott