KEY POINTS:
NEW YORK - When it comes to Asian economies, so much can change in a year, never mind five. Look no further than comparisons between Japan and South Korea in 2001.
Then, the talk was all about what Japan, Asia's biggest economy, could learn from Korea, the region's
third-largest. Korea had risen quickly from the ashes of the Asian financial crisis, while Japan was stuck in deflation.
Today, it's hard not to wonder if the two have reversed positions.
It may seem an odd suggestion, given that Korea is expected to grow 5 per cent this year and Japan is seen advancing at half that rate. Korea's Kospi index is up 9.4 per cent in US dollar terms this year, while Japan's Nikkei 225 Stock Average has barely gained. The won is up 8 per cent, while the yen is unchanged.
But for an economy used to growing 8 to 10 per cent, 4 per cent can seem like a recession. And for all its attractive features, Korea is awkwardly wedged between high-tech Japan and low-cost China. It needs to work extra hard to remain relevant in Asia.
The upshot is that Korea's US$793 billion ($1.2 trillion) economy is being challenged as never before. North Korea's unpredictable regime and nuclear ambitions don't help.
There's plenty of interest in Korea, and rightfully so, given its track record of overcoming adversity. Korea is often among the first markets to come up in conversation with investors, business people and economic policymakers.
Korea bounced back impressively from the 1997-1998 Asian crisis, prompting economists to conclude that Tokyo could learn from Seoul. Korea had cleaned up its bad bank loans, reduced public debt and engineered an influx of capital that helped reinvigorate the economy - all things that Japan still needed to do in 2001.
By the end of 1999, the won had rebounded 37 per cent from its Asian-crisis low. Gross domestic product, which shrank 6.9 per cent in 1998, expanded 9.5 per cent in 1999 and 8.5 per cent in 2000.
Even though growth slowed to 3.8 per cent in 2001, Korea avoided the recessions that hit Japan and Taiwan when the US economy faltered. Growth accelerated anew to 7 per cent in 2002 and the Kospi gained 145 per cent between 1999 and 2005.
Things look very different now. China is booming, Japan is growing and Korea is about to slow. Worse, the combination of a strong won, high oil prices and property speculation may put Korea at risk for the kind of funk Japan suffered in the 1990s.
The danger has been mentioned sporadically over the past couple of years. "We can't rule out the Japan experience unless we contain these problems," Kim Yong Duk, Korea's deputy finance minister from 1999 to 2001, said in June.
Finance Minister Kwon Okyu said Korea's housing market wasn't facing an asset-price bubble. Yet Bank of Korea Governor Lee Seong Tae said last week the recent surge in home prices was worrisome. In October, nationwide apartment prices climbed 1.5 per cent from the previous month, the largest gain since October 2003.
A sudden collapse in property values could take the economy down, just as China is trying to slow growth and US demand is expected to cool.
Even economists who doubt that Korea will go down the Japanese path agree its challenges are daunting.
"China is upgrading also," said Andy Xie, an independent economist based in Hong Kong. "Korea will never have a cost advantage over China. It has to stay ahead of China's electronics and autos constantly."
Perhaps the biggest risk is policy paralysis. In office since February 2003, President Roh Moo Hyun gets poor marks on the economy. Low approval ratings and infighting before next year's election mean Roh's government won't be as attuned to boosting business and consumer confidence as it needs to be.
Japan hasn't suddenly become a role model for Korea. It is still more about job protection than job creation, and its population is shrinking.
But South Korea's challenge may be even bigger. While Korea boasts corporate powers such as Samsung Electronics and Hyundai, it must work harder to thrive in increasingly competitive Asia.
Korea now has a chance to remind the world not to sell its economy short. And it can avoid repeating Japan's experience in the 1990s if the Government takes advantage of the economic growth it now enjoys. The trouble is, that's a big if.
- BLOOMBERG