Korea’s Instructive Non-Crisis; Reforms and free trade help Seoul avoid capital flight
September 6, 2013 Leave a comment
Updated September 5, 2013, 4:26 p.m. ET
Korea’s Instructive Non-Crisis
Reforms and free trade help Seoul avoid capital flight.
Seoul’s markets used to be highly sensitive to contagion from other markets. The country was among the hardest hit by the 1997 Asian Financial Crisis, and when Lehman Brothers went bankrupt in 2008 it was the first place fearful investors looked for signs of impending Asian doom (which fortunately never came). So it’s worth asking why Korea has been a haven for growth and stability as former star Asian performers such as India and Indonesia suffer from capital flight and currency depreciation. In July, as the broader departure of capital from Asia was gathering pace on speculation about U.S. Federal Reserve tapering, Korea saw inflows into its bond market, while flows out of equity markets slowed. Growth was 2.3% year-on-year in the second quarter, a two-year high. Manufacturing and exports are both picking up again.What’s in the secret sauce? One ingredient is better bank regulation after the 1997 crisis. Seoul also dropped its antipathy to foreign direct investment—a good proxy for broader economic liberalization. Whole industries opened to foreign investment, new regulations cut red tape on mergers and acquisitions, and foreigners were allowed to buy property. These reforms proceeded at a faster pace than in any other member of the Organization for Economic Cooperation and Development, according to an OECD paper published in July.
As important has been Korea’s embrace of free trade via high-quality trade agreements with the European Union and U.S. These deals open Korea’s domestic economy to greater competition in an array of goods and services. One consequence is that as investors grow disenchanted with the slow pace of reform elsewhere in Asia, Seoul has demonstrated its willingness to make a tough political decision to boost productivity.
Korean politicians are as prone to backsliding as any, meaning there is constant talk of more interventionist economic policies that could blunt the positive effects of earlier reforms. Korean voters who appreciate their country’s newfound stability need to be mindful of its causes and insist on more liberalization, not less.
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