WASHINGTON, Dec. 11 (UPI) -- International headlines have focused on U.S. seizure of a North Korean boat carrying SCUD missiles to Yemen, but there's another Korean vessel movement of, perhaps, even greater long-term importance to the country and the world. South Koreans go to the polls Dec. 19 to select a new president, with some fundamental questions of the nation's economy, security, and sheer identity at issue. The stakes here involve the direction of South Korea's ship of state.
How South Koreans vote matters not only to them but to international investors. After decades of go-go growth followed by the Asian flu of the late 1990s, South Korea might renew its economy and politics, on the one hand, or sag into a Japanese-style pause and malaise, on the other. Selecting a new leader is always a watershed event for emerging markets; in South Korea's case, it's the more so.
Given South Korea's current election system, the new president will serve a five-year term -- but only one. Such single-term presidencies have proven problematic for other emerging market countries. Whether wise or not, they tend to produce sudden shifts and jerks rather than smooth, ambling adjustments. The new South Korean president is likely to move decisively on his mandate to get things done during the one term he has, meaning some sharp tacks.
This will be true whether it's Roh Moo-hyun of the ruling Millennium Democratic Party, who leads in the polls now, or his challenger, Lee Hoi-chang of the Grand National Party.
On the economy, Roh is running, as have many recent candidates of the left around the world this year, as a Clinton-style moderate. Naturally he stresses the need for a social safety net more than Lee. Yet in last week's debate on the economy, Roh set an economic growth target of 7 percent, and fended off complaints from South Korea's third-party candidate to his left, Kwon Young-ghil, that this equals indifference to the poor. "Economic growth is not the enemy of social justice," the former labor lawyer averred. "In fact, they work together."
Lee came off in the debate as somewhat less aggressive, projecting a more modest 6 percent growth. He favors reduction of corporate tax rates and other investor-friendly tax changes. He hasn't established a comprehensive list of planned spending cuts, but has criticized some specific programs, such as a tourism subsidy, indicating a willingness to restrain spending.
In either case, South Korea's current economic growth rate, at just under 4 percent, is widely perceived as inadequate, and criticized by both sides. That's a healthy fact in and of itself, and suggests that whoever is elected, South Korea will continue with the current government's trend of gradual tax relief, improvement of the foreign investment environment, and greater institutional transparency.
Lee's seven-point plan for reducing corruption, in addition to conventional elements such as greater disclosure of financial history and campaign receipts by politicians, proposes establishment of a cabinet-style system and a four-year presidential term, which would allow presidents to serve two terms rather than one. This would, in fact, be an excellent reform, but how it plays out in the later stages of a South Korean election is difficult to say.
A former supreme court judge widely respected as a clean politician, Lee suffers from his party's past. The GNP, and its martial-law predecessors, were in power during most of the 1980s and 1990s, and as such were much more closely associated with the corruption endemic to such regimes than the recent (1997-2002) Kim Dae-jung government.
On the other hand, Roh's party has held the reins for the last five years, and is not only perceived as having failed on its promises to reduce corruption, but now suffers from a financial scandal involving the family and associates of President Kim. Roh's plan for dealing with corruption focuses on disclosure and other methods, technical solutions, rather than reshaping politics more fundamentally.
On foreign policy, the main issue is South Korea's diplomacy with the ruling dictatorship to the north, and the associated question of Seoul's relationship with the United States. The latter is under increasing strain after the accidental death of two South Korean schoolgirls, run over by a jeep driven by a U.S. serviceman, and the broader problem of Washington's determination to stamp out Pyongyang's recently admitted nuclear weapons and missile export programs.
South Koreans long, as West Germans did, for the eventual re-unification of their artificially divided country. They are, however, reticent (having seen Germany) about the economic cost of such a reunion. And if some recent events have aroused frustration with the U.S. and the Bush administration, others -- such as the discovery of North Korean missile exports en route to Yemen -- have strengthened the opinion that South Korea should deal with North Korea cautiously, and with a big U.S. stick.
Rather than shifting with the winds, Lee has patiently stuck with his basic approach to both relationships, emphasizing his skepticism of the North and his essential comity with the U.S. This is smart policy and smart politics. Last week, when he met with the U.S. ambassador, Roh's party attacked the meeting as suspicious kowtowing by Lee, and favoritism by the Bush administration for a fellow conservative. Then it emerged that Lee essentially used the meeting to urge the U.S. to apologize for the death of the South Korean school girls. When the U.S. did apoligize this week, Lee looked tough, and effective.
Similarly, an emerging brouhaha over U.S. seizure of North Korea's missile shipment was averted, and perhaps reversed, when The Korea Times reported that Washington consulted with Seoul about the vessel and its cargo before seizing it. In fact, the two governments were collaborating even as the ship left port from the North weeks ago. Thus, the fact of the North Korean shipments strengthens Lee's case for suspicion of Pyongyang, while Washington's cooperation with Seoul is hardly suggestive of American arbitrariness.
While this issue is hot and volatile, my own guess is that Lee will benefit from recent events -- especially because he stuck calmly with his core beliefs even when they appeared to be unfashionable.
The wild card in the election may be the divided state of Roh and the left. Roh's candidacy was supported at the 11th hour by National Alliance 21, the other major center-left party, when it appeared likely that the two left parties, by fielding competing presidential candidates, were simply guaranteeing the election of Lee. The alliance, however, has been strained. On December 10, Min Chang-ki, chief architect of the two-party alliance, resigned from NA 21 in disgust, saying the party is not giving Roh sufficient support.
Worse, for Roh, has been the rise of Kwon, candidate of the more leftist Democratic Labor Party. Kwon's surge, to be sure, has merely taken him from a position of an opinion-poll " * " up into the 1 percent range. At his rate of growth, however, and given the press surge he's enjoyed in recent days, that could easily become an election total of 3 percent to 5 percent. That's plenty, in a close race, to tip the election to Lee.
On the bottom line, we're invested in South Korea, but cautiously. The Democratic Century Fund, like a number of aggressive institutions, will trade the election news from day to day, but, as in the case of Brazil two months ago, is likely to take profits quickly after the vote. A Lee win will surprise and confuse some at first, but be an opportunity to buy. A Roh win would presage less sweeping changes in the long-run, but still bring a now-that's settled sigh of relief in the coming weeks.
The market should benefit, in other words, under either scenario, barring a Florida chad type of controversy, as South Korea takes political and economic stock in itself.
You can take a position on South Korea through such New York funds as the Morgan Stanley index shares (EWY), or the capably managed Korea Fund (KF). For those not averse to some exposure to particular sectors, we like the utilities such as Korean Electric Power (KEP). South Korean chip-makers and electronics firms are strong in the long run, but vulnerable to a pullback in U.S. tech stocks, and U.S. consumer spending, over the coming months.
Over a 2-3 year time horizon, we like South Korea compared to such Asian tigers as China and Japan -- but more so if Lee can pull off the upset. All three countries, like most of Asia, face corruption problems. But South Korea's political system is far more advanced than China's. And although its democracy is more recent than Japan's, South Korea may now enjoy a less sticky division of power between the parties, and have more ability to clean up its banking and semi-cartelized production system.
South Korea also has a remarkably free and diverse press, and an informed electorate -- the country is fourth in the world in its rate of internet usage, and higher than the U.S.'s fifth -- that will help it clean out and redirect the ship of state faster. What will take China years to do, and has already taken Japan more than a decade, should happen faster in South Korea. We're on board.
(Gregory Fossedal is chief investment officer of the Democratic Century Fund, managed by the Emerging Markets Group, at www.dcfund.net. His firm may hold some of the securities mentioned his articles. Individual investors should contact their own investment professional before making any decisions to buy or sell these or any related securities.)