More than almost any other country on earth, Korea has learned how to survive while being beset by greater powers.
As any world map will show, the country sits between China, Russia, and Japan – all three of which have taken it in turns to invade this toenail of land over the centuries.
Yet despite its bloody history, the southern half of this tiny nation (the Republic of Korea) has transformed itself utterly within barely a quarter of a century.
Back in the 1980s South Korea was still a military dictatorship; now, thanks to a compact, export-driven economy and a soul-cleansing Olympic Games (Seoul, 1988), it has become a vibrant democracy with the highest Internet penetration in the G20 group of nations.
In many ways South Korea’s economic rise mirrors that of neighbouring Japan’s, right down to the creation of globally relevant, state-supported conglomerates like Samsung, LG, and Hyundai.
Such successes have led to a somewhat cock-eyed view of the world among the country’s slavishly nationalistic newspapers. Read their pages regularly and you would imagine that South Korea’s rise to be predicated solely upon national exceptionalism underscored by an attitude of self-reliance that chimes with North Korea’s Juche cult of isolationism.
The trouble is it’s not true.
To be sure, South Korea’s economy produces great products, from crossover-compact cars to whizzy smartphones. Yet as good as many of these goods are, their success overseas has in large part been down to the nation’s currency, the won, being kept highly restricted.
Such heavy currency manipulation seems at odds with South Korea’s importance as the world’s 15th largest economy, a member both of the G20 and, for the past 15 years, the OECD.
Yet while the US reprimands China, a far more economically backward nation, on a monthly basis for its FX interventions Washington has not challenged Seoul once.
China does seem sincere about making the renminbi tradable in the next decade or two. Meanwhile Henry G. Morris, an old Korea hand and North Asia advisor to alternative asset manager Triple A Partners, note that South Korea “has no timetable at all”.
Overlooking FX manipulation instead seems to be part of a trade-off between Seoul and Washington: the United States gets a loyal ally, one willing to spend billions each year on US-made military equipment and US-grown soybeans. South Korea, in turn – whisper this quietly – gets an economy supported by officials living by the Potomac, and not the Han, river.
Asiamoney asked the OECD, the G20, and the US State Department whether such an trade-off is why Korea’s FX manipulation is not criticised, and received a resounding “no comment” from all quarters.
But an American state official, on condition of anonymity, concedes that South Korean economic strength is of paramount importance. “South Korea is the only buffer against the madness of North Korea. We need to keep it strong. Sometimes you can’t afford to rock the boat.”
Such facts don’t work well with the myth of Korean exceptionalism that its papers work so hard to nurture.
The consequences of self-deception
The danger is that myths based on self-deception can morph into self-deceit.
Having built a successful industrial economy, Seoul officials seem to genuinely believe that the capital is destined to become a regional, and even global, financial supercentre. Yet signs of this being based in reality are few and far between.
South Korea has a promising short-selling market, and its banks are still mending nicely and learning from the strains of the 1997-1998 Asian financial crisis. But that is all. The country remains too instinctively self-defensive, its regulatory decisions too politically motivated, to become a financial giant just yet.
Take the 2009 Financial Investment Services and Capital Market Act, which stymie Korea-based financial advisers (local and foreign) from sharing client information with sister personnel based overseas. If this law is taken to the letter, how would any Korea-originated foreign M&A deal ever take place?
Or look at the financial regulator’s decision to slap Deutsche Bank earlier this year with a six-month ban preventing it from trading on its own account. The German bank was guilty of nothing more than poor timing: it opted to short US$2.3 billion-worth of Korean securities on the same day that president Lee Myung-bak happened to address the leaders of the G20 in Seoul.
The Korean authorities were furious for the bank causing a sudden share drop just as their leader became the first from outside the group of eight leading industrial nations to host such a meeting. The regulator slammed the traitorous foreigners, and Deutsche quietly accepted its ban.
Viewed from outside Korea, the decision was appalling – a political act designed to humiliate a largely blameless global investment bank that was acting within the rules (legally if not in spirit) in order to book profit.
Seoul may not like crass commercialism that does not chime with its own terms and conditions, but it needs to learn that it cannot always have its own way if it is to ever become a regional financial power.
In many ways the modern Republic of Korea is a fabulous industrial success story, boasting companies that create products consumed across the world.
But its rise has fostered a sometimes bellicose self-belief among the country’s top circles that they can do whatever they want, even as a key factor for the country’s strength – the support of an ailing US – becomes increasingly brittle.
Juche self-reliance is all well and good, but not if it leads to delusion.