As the UN Secretary General calls the coronavirus “the greatest test after the Second World War”, in South Korea similar terms have been common to describe the sobering primacy of the 1997-98 Asian Financial Crisis; so psychologically traumatic to be widely considered as the most tragic national event since the Korean War (1950-53). The daunting memory of the AFC crisis, then surged as yardstick against which every successive economic downturn has been assessed.
Unlike autumn 1997, when the government was left with no option but to seek a bailout from overseas to spare the chaebol from bankruptcy, which led the IMF to step in with the largest single rescue package that had ever made, this time around South Korea - the world's 11th largest economy - finds itself in a hugely different place. Amid the specter of a global economic recession that looms large on the COVID-19 pandemic, the incumbent liberal government can rely on a comprehensive toolkit – particularly in terms of foreign exchange reserves and access to credit facility options – made available in the aftermath of previous experiences, mostly the 2008 global financial downturn, to boost the rapidity and capacity of the response. Seoul has already won international kudos for its health sector’s relatively high capacity of reaction largely informed by its prior epidemic outbreaks but domestically the government is expected to show the same degree of preparedness to handle the near-economic standstill.
When the COVID-19 emergency first broke, manufacturing inside South Korea remained largely undisrupted. Nonetheless, the economy was put under strain. Its industries, mainly the automotive and electronic sectors, experienced an initial blow in the form of a supply shock as parts suppliers in China became unable to continue production. Then, as factories gradually resumed operations and Beijing relaxed travel restrictions, Korea’s other major trading partners imposed dramatic measures to limit the spread of the virus, leading the country’s activity to suffer from its fastest drop in eleven years. Even though Seoul has refrained from the kind of extensive lockdowns underway in Europe and elsewhere, it should deal with the collateral impacts. Predictably, the COVID-19-related supply chain troubles is the latest wakeup call for South Korea’s economy heavy dependence on trade, particularly towards Beijing. As shown by the Korea International Trade Association, in 2017, Korea’s global value supply chain participation rate was 55%, and ranked sixth out of eighteen major economies within the Organization for Economic Co-operation and Development (OECD). In this light, the Moon administration has pursued policies – most of them already introduced by his predecessor – aimed at diversifying the economy and making it less reliant on exports with a greater focus on high-value services.
In response to the current phase of combined crises, the government has put forth a series of stimulus packages and established an emergency economic council that would make swift decisions to keep the economy ticking over the short and medium term in tandem with the central quarantine headquarters in charge of containing the virus. By the time South Korea was hit by the first major outbreak outside of China, approval ratings for President Moon and his Democratic Party of Korea were slipping but the slowing of the spread seems to have reversed the downward spiral. At the end of March, the president’s popularity hit a 16-month high, while that of the ruling party was 15% higher than the conservative main opposition United Future Party.
The drop in Moon’s approval ratings registered before the COVID-19 outbreak was mainly due to the perceived failure of delivering the socio-economic policy promises of his 2017 presidential campaign. Eager to carry on the legacy of the Candlelight rallies – the unprecedented citizen mobilization that ousted President Park Geun-hye – Moon promised to tackle the deep inequalities within the South Korean society by redistributing wealth and restoring the middle class. Although Korea’s GINI coefficient of 31.6 is not necessarily bad when compared to that of other G20 countries, such as Japan (32.9), France (31.6), Canada (33.8), the perception of fierce inequality is still at the center of the domestic debate. Unsurprisingly, the harsh divide between the “dirt spoons” and “gold spoons” mirrored in Bong Joon-ho’s Oscar-winning “Parasite” resonated forcefully also within South Korea, where the majority feels the strain of an unfair distribution of income.
In this regard, the condition of youngsters, women in the workforce and the elderly population is particularly sobering. According to the World Economic Forum, South Korea ranks 127 out of 153 countries in terms of economic participation for women, and the pay gap is the largest within the OECD. By the same token, the findings presented by the Korea Women’s Development Institute last year show that 79.1% of young women and 72.1% of young men wish to leave Korea, which is described as "hell" by 83.1% and 78.4% respectively, and more than 60% define themselves as “losers”. As for older generations, 45.7% of Korean over age 64 live in relative poverty, a much higher quota than the 12.9% OECD average.
Ahead of the upcoming electoral appointment, the growing discontent among youth and women regarding persistent inequalities is particularly relevant for the ruling party, given that Moon’s victory was bolstered by the strong support of these cohorts that continue to struggle amid the lack of opportunities. At the start of last year, the administration managed to live up to one of its main promises as the minimum hourly wage rose to 8,350 won (6.9 US dollars), a nearly 30% increase since Moon came to power. However, the move has backlashed as firms scaled back recruitment amid mounting labor costs. In spite of unconvincing economic indexes, the president has been eager to push forth his demand-driven economic program with emphasis on a “people-centered economy”, “income-led growth” to be achieved within a more level corporate playing field. Last February, unemployment and job creation rates showed some sign of improvement. Unfortunately, prospects for the South Korean economy to gain its recovery momentum this year could remain unfullfilled due the fallout from the new coronavirus.
In 2002, the IMF acknowledged that a key lesson from the country rapid recovery in the aftermath of the Asian Financial Crisis was the importance of the political leadership of then-President Kim Dae-jung (one of Moon’s political mentors) who was able to “unify the country to overcome the crisis”. The international community has already given credit to Moon’s successful handling of the health emergency based on the three major principles of openness, transparency and democracy, while minimizing restrictions on the movement of people and goods. The upcoming general election results might not transform Moon into a “lame-duck” president. Still, the COVID-19 medium and long-term economic impact threatensto haunt him until he leaves office in 2022. Domestically, his bandwidth to carry out his socio-economic agenda could be severely reduced to the point that the promise to complete the rebuilding of a “fair and just country” risks to wait for the next progressive administration to come.