‘Time is not on Korea’s side’

The so-called Korea discount is credited to the lack of credibility and transparency in governance.

Jun Kwang-wooThe author, a former chairman of the Financial Services Commission, is chairmanof the Institute for Global Economics. The first cut in four years by a hefty 50 basis points by the U.S. Federal Reserve last week is a declaration of pivoting away from the super-restrictive environment in the aftermath of the pandemic. The world’s top economy is “recalibrating” to soft-land after extreme measures of running interest rates at 20-year highs for two years to tame the fiery inflation caused by global supply disruptions and the ultra-loose monetary policy during the pandemic period.

The synchronized pivoting by some of the world’s most consequential central banks is expected to galvanize volatility in global financial markets coupled with the waves of the AI-led digitalization revolution and geopolitical risks through the momentum of the U.S. presidential election in November. Vice president and Democratic presidential candidate Kamala Harris has turned the table against Republican re-bidder Donald Trump through a TV debate, but the run-up to the voting day 42 days later remains uncertain since the second assassination attempt on Trump.

The Nov. 5 election goes beyond the level of naming the new leadership of the United States, as its upshot will have historical ramifications on the global economy and geopolitics as well as the world order, including Northeast Asia. No matter who comes out as the winner from the cut-throat race, the United States will surely toughen its own interests and maintain a hard-line stance toward China.

Trump has vowed to levy a universal 25 percent tariff on all imports, if re-elected, which will dwarf the tariffs in his first term. Harris also made clear her will to keep China in check if she wins the election. Both candidates vie to toughen up against the Asian power disliked by more than 70 percent of Americans. Enhanced protectionism through stronger tariffs and sanctions — and tit-for-tat responses between Korea’s two key export markets — could deal a critical blow to the Korean economy.

The tariff bomb and additional sanctions can hit harder on China at a time when its economy is struggling with weakening fundamentals. The economy battered by a real estate meltdown and soured public sentiment is suffering from a “crisis of confidence” from consumers and investors at home and abroad, according to The Economist.

The stock market mirrors investor sentiment for a country’s economy. Although immediate swings should not be overlooked, stock prices nevertheless serve as a reliable gauge of the current status and future direction of the macro economy and business activities. This year’s biggest losers are China and Korea. As of last week, the S&P 500 and Nasdaq indices gained 19 percent and 20 percent, respectively, while Japan’s Nikkei added 10 percent and India’s NIFTY 50 gained 17 percent. In contrast, the Shanghai composite index lost 9 percent, and Korea’s main Kospi fell 5 percent and its secondary, Kosdaq, dropped 14 percent.

There are multiple factors for the Chinese and Korean stock markets’ poor performance against their U.S., Japanese and Indian counterparts. But from investors’ viewpoints, the two countries’ stocks have a distinct weakness. Despite some differences, the two economies are plagued by the structural 3Ds — debt, default and demography. An excessive debt load, weakness in the real estate market and demographic challenges from a low birthrate and fast aging weigh down their economies.

Japan is also overleveraged and superaged. But in the eyes of outside investors, the difference is that Japan, like the United States, poses as a reliable free democracy and an open market regardless of who rules the country. Political risk is much greater for Korea, where a progressive party favorable to North Korea and China and hostile to Japan makes up the bulky opposition. The so-called Korea discount is credited to the lack of credibility and transparency in governance. But reform in the governance in politics is more urgent than in corporations. Chinese shares stagger because corporate dynamism and creativity have shrunken under the one-party dictatorship with little prospect of improvement.

During a recent international forum in Seoul, Tokyo-based journalist William Pesek warned that time is not on Korea’s side regardless of who wins the U.S. election, pointing to slow progress in reform tasks to correct the country’s path towards structural stagnation. Robert Barro, a Harvard economist, warned that Korea is wasting its hard-won “Miracle on the Han” achievements through its populist quests. Korea must radically pivot and reset its governance system for the government to regain public confidence and traction for reform drive in the remainder of the presidential term to navigate the economy away from the abyss.

Translation by the Korea JoongAng Daily staff.