India gains importance for Seoul as South Korea’s ‘miracle economy’ starts to face major new challenges
Brahma Chellaney, The Times of India
South Korean President Moon Jae-in’s visits to India and Singapore this week underscore his “New Southern Policy” (NSP), which gives priority to deepening bilateral relations with the ASEAN economies and India. NSP was unveiled on the heels of Moon’s “New Northern Policy”, whose primary but unstated objective is to jointly develop Russia’s Far East with Moscow. Simply put, the dual policies aim to invest greater resources in countries that previously were not on South Korea’s priority list.
Moon is seeking to diversify South Korea’s external portfolio so as to build a more “balanced diplomacy”. But while India’s Act East policy is driven by both geostrategic and geo-economic factors, Moon’s NSP is rooted mainly in economic logic.
There isn’t much room to expand Seoul’s already well-developed relations with China, Japan and the US. In fact, with new issues cropping up in ties with China and America, export-driven South Korea must find new markets to cut reliance on its top two trade partners. Moreover, despite increasing exports of semiconductors and electronics, South Korea’s economic growth has slowed, presenting it with important challenges.
Moon is targeting economies with the greatest growth potential: Several ASEAN economies and India are projected to grow at annual rates more than double that of South Korea in the coming years. Seoul, however, is not alone in courting Southeast Asia and India.
Japan under Prime Minister Shinzo Abe has pursued a “southward advance” economic strategy. Taiwan’s new “Southbound Policy” is driven by the same economic rationale, and seeks similar strategic objectives, as Moon’s NSP. China too has a southern policy, which goes by the official name of “One Belt, One Road”. Then there is Australia, which is looking at Southeast Asia and India, in part to mitigate its China-related risks.
Similar risks are also driving Moon’s NSP. China’s heavy-handed economic sanctioning of South Korea, in response to the US deployment of the THAAD anti-missile system, has served as a wake-up call for South Korea, making it conscious of its vulnerabilities and forcing a rethink. Although the informal Chinese sanctions began before Moon was elected president, the shock therapy administered by China’s use of economic coercion as a tool of statecraft led to his NSP.
South Korea is too heavily dependent on one market — China’s market — a factor that arms Beijing with considerable leverage over Seoul. Diversification is essential to a hedging strategy. And hedging is at the heart of Moon’s NSP.
Today, rebooting inter-Korean economic relations is emerging as an option — an option that can yield rich dividends if progress were made toward denuclearizing North Korea. Failure to build enduring inter-Korean peace, however, could rebound on the South Korean economy. Whatever scenario unfolds, the NSP imperative will likely remain intact. NSP, despite its economic focus, promises to yield broader diplomatic and strategic benefits for Seoul.
However, NSP is not an answer to the South Korean economy’s structural challenges. South Korea needs to make its economy less vulnerable to external shocks by undertaking structural reforms. In fact, Moon took office with a strong mandate to “democratize” economic growth and cultivate innovation by switching priorities from the giant family-owned conglomerates known as chaebol to smaller enterprises and start-ups and by encouraging bottom-up jobs growth. The country’s chaebol-centred crony capitalism spawned an influence-peddling scandal that cost Moon’s predecessor her job.
South Korea’s challenges largely arise from its extraordinary success in transforming itself from an economic minnow to the world’s fifth-largest exporter. South Korea was one of the world’s poorest countries in the early 1960s before it embarked on rapid economic expansion, becoming the world’s fastest-growing economy between 1963 and 1979. In 1996, South Korea joined the OECD, the club of the world’s wealthiest nations.
South Korea escaped the “middle income trap” in large part because of its democratic transition. China, however, risks falling into that trap. The fact is that South Korea went from poverty to wealth in almost one generation. There are few examples in modern history of such rapid economic success. But success can breed problems.
An unintended consequence of South Korea’s remarkable success has been its high exposure to global market volatility. South Korea has a high trade-to-GDP ratio, which is a good indicator of how vulnerable any country is to the dips and dives of the global economy. Ongoing changes in global market conditions, including US protectionism and the US-China trade war, will likely hit the South Korean economy harder than less export-dependent economies. For example, a deepening slowdown in China brought about by US tariffs would undermine South Korean exports to China, thereby further depressing South Korean growth.
Moon’s India visit was part of his effort to tide over such challenges. From enlarging South Korea’s footprint in the world’s third-biggest consumer market by purchasing power to peddling wares to the world’s largest arms importer, Moon sees India as central to NSP’s success. However, at a time when many chaebol are navigating generational transitions and Moon has committed to “democratize” economic growth, structural reform at home is the price South Korea must pay to sustain a “miracle economy”.
The writer is a geostrategist.