We need to talk about Korea

I just visited my brother who lives in Korea – the opportunity to visit this country stuck between two major economic and touristic magnets that are Japan and China. On an economic and financial basis, Korea has been a very interesting subject of observation as it is probably the least known of the major global economies.

gangnam

Gangnam – in real life less exciting than the song

A few facts
With an annual growth rate in GDP of 8% from 1962 to 1989, South Korea over compensated its low natural resources endowment and tiny home market to become an export powerhouse. Think of Samsung as a global household name.
Several aspects of the Korean capitalism are worthy of a mention:

  • The economy is in the global top15, the size of Canada’s, a member of the G8
  • The economy is dominated by a few industrial conglomerates called Chaebols
  • Most fortunes outside of the heirs of Chaebols were made in property

I will detail some observations below.

korea ghana

The Korean Tiger and the Ghanaian Eagle – a modern twist on La Fontaine.

Slowly becoming European
One aspect I did not expect was finding many marks of Europe. Some are great such as the well-developed coffee culture – there are tons of places to sip a cappuccino. Others are some economic ills such as large youth unemployment (20%), a rapidly aging workforce, a national pension fund which is facing bankruptcy without reform and taxation which is increasing for higher income individuals but decreasing for large domestic corporations. Last but not least, the government is adding rights for workers, such as severance pay at the smallest firms or extra holiday entitlement after a year of service (15 days vs one day off a week and the 1st of May), Paradoxically, as Europe tries to cut entitlements, Korea adds to the protection level. This will not affect the competitiveness of the economy much as Koreans are not confronting their employers: severance pay is therefore rarely paid at all to avoid losing face.

The Chaebols
One of the fascinating aspects of Korea is the Chaebols. They dominate the economy, with the top10 representing 3/4 of GDP! In the US, Berkshire Hathaway, Warren Buffett’s conglomerate, owns only 5 of the Fortune 500 companies. If it had as much reach as Samsung in Korea, it would own 140 of them!
The biggest ones are by order Samsung, Hyundai / Kia, SK, Hanwha, LG and Lotte. Most economic sectors will be oligopolies controlled by a few Chaebols. For instance, electronics are dominated by Samsung, LG (think of the TVs) and SK (owner of Hynix, making the memory of your Apple products). This has one major consequence: the Small and Medium Enterprises cannot develop since their clients are the Chaebols. Which created a feudal relationship whereby SMEs are paid and given contracts when the Chaebol so wish. All is well when the Chaebols are growing fast but growth has slowed recently. SMEs cannot bring innovation to the market since their main customer would then block them off. This can explain why Chaebols are controlling an ever-bigger part of the economy while the average GDP growth has slowed. Clearly not the good recipe for the long run.

chaebols

Korea’s very own 1% tale

Immigration
South Korea welcomes around 250,000 immigrants every year, which is needed to combat the rapid demographic aging (the fertility rate is an ultra-low 1.2x). Around 2/3 of the immigrants come from China and are ethnic Koreans. Other immigrants come from the Philippines, Thailand, Vietnam and increasingly from the Asian Caucasus nations such as Uzbekistan. On a 50 million population, this compares well to the million immigrants to the US (population of 320m), 400,000 in Germany (80m) or 300,000 in the UK (65m). This topic is quite controversial given the youth unemployment and rarely broached in public. It is different to Japan where immigration is not only a taboo but also insignificant.

Reunification of both Koreas – prospects
A reunion of both Koreas would combine the strength of the North: large mineral wealth, access to many rail links to China and Europe, a young population to rejuvenate the whole, with the current prosperity in the South. However, the German experience show how complicated such process can be. Let’s look first at a few numbers to compare Germany and Korea.

Graph1
Translating this into ratios may help us further.

Graph2

There are three scenarios:

  • Full integration by the South

When you visit the DMZ, the demilitarized zone marking the frontier, the guides and tourist videos entertain the aim of reunification, with the South leading. It seems that the appetite for this scenario comes from the North mainly as they look favourably at the financial support in offer. Looking at the tables above, the cost of reunification would be a factor of magnitude higher than the German experience. South Korea cannot shoulder this level of expense. What the tables do not highlight is the total lack of infrastructure in the North. It has no banks for instance: even if the South were to send money, the population would not be able to receive it!

  • One Country – Two Systems

This is the preferred view of the South, on the model of China and Hong Kong (reversed for this case). A strong cooperation would allow the North to catch up with the South over a few decades before a reunion can be envisaged. This scenario would be less costly and more flexible but the North is obviously less keen.

  • No reunification

This is my belief. Both countries have started to diverge culturally – the language spoken is not the same anymore while the younger South Korean generation does not care about the North. Given the difference in GDP per capita ratios, if the North were to grow at 8% pa while the South grew at 2% pa going forward, there would be junction in 62 years only. Imagine a peaceful to democracy transition within 10 years in the North. Add these 62 years and it will be 2087 before both countries are matched economically. Both countries were separated since 1948 – it is unlikely to me that both populations could consider a reunion after such a hiatus. In addition, there has to be a strong support in the region for a reunion. Neither China nor Japan want to see a 75million people economy with nuclear weapons on their doorsteps.

IDL TIFF file

How many North Koreans do you need to change a light bulb?

December Competition
Once again, I would like to invite the winner to have breakfast with me and if we cannot be in the same city, I will send him/her some chocolate before Christmas.
One amazing feature of Seoul were the people glued to their phones, which promises many neck pain and eye conditions going forward. Look at the following video. Count the number of people not on their phones and leave your answer in the comments section of the blog or by email before Wednesday 9th of December. I will then draw the winner among the right answers.

Seoul Metro Mobile Phone Lovers

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