Korea

FOOTBALL IN KOREA South Korea is one of the most successful Asian countries in football, with 2002 marking its fifth consecutive appearance in the World Cup finals. Co-hosting the games will be the most important sport event organized by Korea since the Seoul Olympics in 1988. In preparation, 10 brand new stadiums have been built in 10 cities, including the largest football-only stadium in Asia. In the midst of an export collapse in 2001, these construction activities surely must have helped buttress domestic demand, which, next to China, proved the most resilient in Asia. Efforts were made to persuade North Korea to co-host the games on the peninsula. The reclusive North declined, which is a pity given its colourful history in the sport. The most memorable vignette, reminisced in a recent FT article (“Where have they been?”, March 23, 2002), involves the 1966 World Cup hosted by England. The largely unknown North Korean team, the “Red Mosquitoes” (!), managed to defeat Italy, one of the top three football powerhouses in the World, playing a rather unorthodox running game dubbed “Chollima”, or lightening horse. THE STATE OF THE ECONOMY Much has happened in theKorean economy since the last time we published ourWorld Cup book. Just six months before TeamKorea headed off to the finals in France, the economy barely escaped a full-fledged balance of payments crisis. A sizeable IMF package notwithstanding, real GDP ended up suffering the sharpest contraction on record in 1998, at –6.7%, as domestic demand collapsed to generate large current account surpluses to pay back external debt. The economy subsequently staged a stunning recovery in 1999-2000, growing 10.9% and 9.3%, respectively, on the back of an export boom, especially in IT products, but only to be buffeted again in 2001 by the most severe collapse in exports in 30 years. Signs of export bottoming began to emerge in late 2001, unleashing one of the strongest equity market rallies in the world. The cyclical swings in the Korean economy in the past four years leave little wanting in drama. But we see even more significant changes on the structural front that we think will prove a lasting legacy of the 1997-1998 financial crisis. First, the once cosseted domestic financial markets have been fully open to foreign investors. Second, in contrast to the World Cup co-host, Japan, the Korean authorities moved quickly and decisively in recapitalising and consolidating the banking system through injections of public money. Third, the corporate landscape has dramatically changed, with closure or mergers of many chaebol affiliated firms. Finally, fundamental changes in the “rules of the game” governing financial markets have palpably altered the incentive structure of market participants. In a nutshell, there is a greater awareness of business and balance sheet risk, as evident by the greater cautiousness in the corporate sector in embarking on fixed investment through taking on debt. Korea weathered the recent export collapse well by regional standards on the back of surprisingly resilient domestic demand. Although expansionary cyclical policy played a role, the extent of policy The World Cup and Economics 42 World Cup 2002 THE 2002 WORLD CUP South Korea, along with its co-host Japan, is the first Asian country to host the World Cup. Given the less than placid history between the two nations, ironing out the logistics stretched to the limit the art of compromise. Korea will kick off by hosting the opening game,while the more coveted closing gamewill be hosted by Japan.To help even things out,Korea’snameappears before Japan’s in the 2002 FIFA World Cup logo, reversing the lexicographic ordering. 2002 will mark Korea’s sixth appearance in the World Cup, though it has yet to win a match in the finals. Hopes abound that this drought will end this year, especially givensomeevidence that thehome turf may boost the hosting country’s performance. In a bid to break the winless streak, Dutchman Guus Hiddinkwas hired as coach in January 2001, making him the first non-Korean to coach the national team.Key players include Ki Hyeon Seol, forward for the Belgium team Anderlecht and Dong Gook Lee, also known as the “Lion King”. Myung Bo Hong, the team’s oldest player, will lead the defence line-up. easing does not appear sufficiently aggressive to explain its resiliency.Amore convincing explanation is the structural shift in the flow of funds. As mentioned above, the corporate sector has remained cautious in borrowing, leaving a surfeit of funds available for the personal (household) sector. The resiliency of domestic demand or,more precisely, the non-tradable sector, has been the direct result of the personal sector reducing saving (i.e., consuming more) and investing more by leveraging up its balance sheet. We regard these shifts as a medium term positive, as they will allow Korea to squeeze more growth out of the domestic demand and be held less a hostage to the swings in external demand. Export collapse and the retrenchment in manufacturing, both of which were strong headwind in 2001, are increasingly turning into a tail wind, re-enforcing the strength in domestic demand. The greater traction in the real economy is translating into rising risk appetite in the financial system, with loan to deposit ratio beginning to recover. These trends point to the risk on the economy being skewed on the upside. While the recent run up in property prices has begun to fuel debate about the risk of overheating, worries about rapid pick up in CPI inflation is still premature. Any policy tightening by the Bank of Korea during the course of this year will therefore likely be moderate, at 50bp to 75bp.We expect some additional policy tightening to be delivered through a strengthening currency. STATE OF NATION With the non-renewable and fixed 5-year term drawing to a close for Mr. D.J. Kim, Korea will hold its Presidential election in December 2002. It is yet too early to prognosticate with any degree of confidence on the likely winner. But it isworth noting that the basic thrust of economic policy, both structural as well as cyclical, is not expected to hinge critically on who ends up occupying the Blue House. Democracy has considerably matured in Korea. Moreover, after having flung open the Korean market, it would be both difficult and inadvisable to try to put the genie back in the bottle. Asregard to NorthKorea,homeof the erstwhile “Red Mosquitoes”, it remains to be seen whether the next administration will switch tack from D.J. Kim’s policy of engagement (“sunshine policy”), which earned him a Nobel Peace Prize. At any rate, the lessons from Germany have not been lost to the Koreans, who are now all too aware of the strains of “shock” reunification. Policy toward the North will therefore continue to be guided by the desire to minimize the risk of a sudden regime collapse. Previous Appearances: 5 1954, 1986, 1990, 1994, 1998