Security alliance mattersEconomic growth cannot be simply explained from production factors like labor and capital and policy variables. Growth in a small and open economy like ours hinges on global economic and geopolitical conditions. It is therefore essential for policymakers to foresee external factors and come up with appropriate measures and strategies to steer the economy in a way that allows sustainable growth and prosperity. Moreover, it is crucial to address geopolitical risks from our living in a land divided so that they don’t interrupt or hurt growth of the economy.
South Korea was able to achieve industrial development and modernization that took most European nations more than a century to accomplish in less than half a century because it had the fortune of meeting such needs. Our development model focused on international commerce and finance, the right choice to fuel growth in our early stage of development. A solid security alliance between Seoul and Washington provided a guarantee of geopolitical stability on the Korean Peninsula. Since the two nations signed a military alliance pact in 1954, the Korean economy has never been shaken in a big way by geopolitical risks.
What about now? Are we really making the right choices in response to changes on the international stage? The global economy thankfully is in a recovery phase led by improvements in the U.S., Eurozone and Japanese economies. This is good news for the export-reliant Korean economy. But the policy changes in response to the economic recoveries in major developed economies — such as reining in loose monetary programs and increases in interest rates — could work unfavorably for our economy. The policy shift in central banks of mature economies will likely cause turbulence in the international capital and currency markets.
Policy actions are important to protect the local economy and markets susceptible to external variables during such a transitional period. We have the painful history of having been slammed by financial and currency ills that spread across Asia in 1997-1998. The Korean market had already been on lists among foreign investment banks advising scrutiny in investment. A financial reform bill failed to pass the National Assembly, aggravated by political stalemate and bureaucratic incompetence. As a result, the economy lost the confidence of foreign investors and South Korea had to seek an international bailout due to an out-of-control liquidity crisis.
The Korean economy is much stronger now than in the 1990s thanks to its hefty foreign exchange reserves, a more balanced debt structure, and stable financial status of the corporate and financial sectors. But it can be vulnerable to external factors because capital markets have become more liberalized and connected to the outside markets. It is important to sustain strong ties and currency swap agreements with central banks around the world.
At the same time, fundamentals and productivity should be reinforced and the labor market reformed in order to hone competitiveness and turn the markets friendlier towards business and investment. These policy priorities, however, have been neglected. We must not forget that financial crisis can hit us again at any time.
Worse, geopolitical risks have escalated to an unprecedented level. South Korea is in its biggest postwar security crisis due to North Korea’s repeated nuclear and missile tests. Fortunately, the global markets have not reacted hysterically to the heightened risks in South Korea. This is because they don’t doubt the solidity of the Korea-U.S. security alliance. Investors and credit rating agencies are keeping close watch on the developments on the peninsula, but are not poised to act rashly because they believe that tensions will not build up to an extreme such as a war.
Yet we must not let our guard down because the bilateral alliance under unpredictable U.S. President Donald Trump cannot be fully relied upon. The government must take extra care to tend to the alliance and defend peace from the provocative North Korean leader Kim Jong-un so as not to jeopardize our economy.
Reports that Trump wants to abandon the bilateral free trade agreement with South Korea raises concern because such talk in Washington could suggest some significant changes in Uncle Sam’s fundamental approach to the decade-long alliance.
Translation by the Korea JoongAng Daily staff.
JoongAng Ilbo, Sept. 9, Page 31
*The author, a former finance minister, is an adviser to the JoongAng Ilbo.