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It’s Korea’s Economy, Debt, Stupid: William Pesek Jr. (Update1)

March 12 (Bloomberg) — Few world leaders would relish running South Korea. Asia’s No. 4 economy is grappling with a debt crisis, a tough job market and threats from the North.

And what are elected officials doing to reassure investors? Trying to remove the president.

Lawmakers today voted to impeach President Roh Moo Hyun for alleged election law violations. Roh is suspended for as long as six months as Korea’s Constitutional Court considers the case. Prime Minister Goh Kun will be acting president.

It’s highly uncertain whether Roh will be removed from office permanently. This is, after all, Korea’s first impeachment process. Roh’s alleged misdeed is so minor that election officials can’t agree on whether he did anything wrong. It’s anyone’s guess if the court will validate the impeachment vote.

Yet whether Roh survives isn’t the point. Such political shenanigans — and television images of lawmakers scuffling — sent troublesome signals to investors about the volatile state of Korea’s democracy. They also showed the government is too distracted to fix the economy or calm tensions with North Korea.

`Turmoil’

“The impeachment will throw not only the economy but South Korea as a whole into turmoil,” says Jang Hasung, professor at Korea University and the nation’s best-known shareholder activist.

Roh gets some blame, too. Forces trying to remove him say an apology would’ve cleared up his alleged violation. Roh refused to back down, claiming he did nothing wrong in January when he voiced support for the campaign of a political party. As a civil servant, Roh is supposed to appear neutral.

The lessons from former U.S. President Bill Clinton, another leader who faced removal from office, come to mind. Clinton’s 1992 election campaign slogan was “It’s the economy, stupid.” For Korea, it’s not only the economy, but debt, too.

To boost growth after the 1997-1998 Asian crisis, Korea encouraged banks to lend less to companies and more to households. The dark side was that individuals, most with little experience with debt, got in well over their heads.

One in 13 of South Korea’s 48 million people is three months or more behind on debt payments. Fast-rising delinquencies are crimping consumer spending, which makes up more than half of Korea’s $477 billion economy. Companies borrowing too much caused Korea’s meltdown in the late 1990s; now it’s consumers imperiling things.

Saving some Borrowers

Among the more striking side effects, bad loans at 19 banks, including Kookmin Bank and Shinhan Financial Group Ltd., owed by households and corporations rose by 3.5 trillion won to 18.6 trillion won in 2003, according to the Financial Supervisory Service.

Now, the government is bailing out at least 400,000 individuals who can’t pay their debts to boost an economic growth rate that fell by half last year to about 3 percent. The plan applies to people who borrowed less than 50 million won from at least two lenders. About 1.5 million Koreans meet that criteria.

At a time when Korea needs to hone its global image, it’s bizarre to see lawmakers try to impeach Roh. It’s also bizarre that Roh wouldn’t just apologize.

“Politicians are acting stupid, businessmen are just waiting and seeking which side will be in their own interests and the public is just sick to death about what’s going on,” Jang says.

Politicians need to keep their eyes on the big picture. China’s dynamic economy is hogging most of the foreign investment flowing to and around Asia. Korea needs to convince a skeptical world that its economy shouldn’t be ignored. It also must reassure investors it’s on top of the North Korea issue.

Hostage Economy

While this may be domestic politics gone awry, there’s a serious risk of it filtering into Korean markets, which, let’s face it, aren’t exactly booming. You also have to wonder how all this is playing in Pyongyang. Can North Korea still take the South’s government seriously?

“This whole impeachment threat shows how politicians are willing to take the economy hostage for their own survival in the election,” said Lee Phil Sang, an economics professor at Korea University in Seoul. “The Korean people don’t want to impeach the president they elected one year ago. They want stability and economic prosperity.”

While challenges remain, things are looking up in the economy. Exports grew 46 percent from a year earlier in February, their fastest pace in 15 years. Business confidence reached a 17- month high in February, suggesting companies are becoming more willing to invest.

That Roh’s detractors said they wouldn’t try to impeach him if he showed remorse makes the whole thing a joke. An action egregious enough to warrant impeachment shouldn’t be something the words “I’m sorry” can clear up. And it’s quite a coincidence that all this comes a month before parliamentary elections.

Voters know that and polls show a majority of them are against impeachment. The average Korean would prefer that the government focus on raising living standards and keeping North Korea’s nuclear missiles in their silos.

The same is true of investors, many of whom may now have yet another reason to avoid Korea.

To contact the writer of this column:

William Pesek Jr. in Seoul, or wpesek@bloomberg.net.

To contact the editor of this column:

Bill Ahearn in New York, or bahaearn@bloomberg.net.

Last Updated: March 12, 2004 01:20 EST