SEOUL: These should be happy times in South Korea. The country’s largest corporations, Samsung and Hyundai, have won global respect for their electronic goods and automobiles. Its scientists are making breakthroughs in stem cell research. Korean Internet games, films and pop stars have swept Asia. But the mood in Seoul, the nation’s capital, is hardly cheery. Merchants complain about sluggish sales. Workers fret about lack of job opportunities. Many smaller businesses can’t get financing, while those who can are reluctant to hire or make new investments in Korea.

“Business is dead,” says Ko Jeong-hwa, who has been selling eyeglasses for 20 years at Namdaemun, a huge traditional market in central Seoul that is a bellwether of economic activity among working-class Koreans. Almost a decade after the Asian financial crisis, the South Korean economy is still coping with fundamental problems that could limit its long-term growth prospects and ability to rise among the world’s budding industrial powers.

South Korea is a test case of whether a once-poor nation that has become a manufacturing exporting powerhouse can also develop a strong domestic economy and financial system. Japan, which followed a similar path of promoting its exports at the expense of its domestic economy, is still paying the price with a two-decade-long economic malaise, analysts say. Exports certainly are the engine of the Korean economy. Booming shipments of Korean-made cars, semiconductors, electronics and industrial machinery drove the economy’s 4.6 per cent growth last year. And although slowing in recent months, exports have been strong enough to keep gross domestic product expanding at a 3 per cent pace this year.

By itself, that growth rate isn’t bad. Although just one-third of China’s and slightly less than the United States’, it’s still higher than that of Japan and most countries in Europe.

But the statistics mask some fundamental challenges for South Korea’s economy, the world’s 11th largest. One is the nation’s underdeveloped service sector, including its troubled financial industry. A more developed service sector is seen as essential to expanding Korea’s domestic economy, which still struggles with sluggish consumer spending and tepid job creation. A recent pick-up in department-store sales offers hope that Korean consumers are beginning to recover from a credit-card binge of a few years ago that left many households deep in debt.

Another challenge is China, which has presented many nations, particularly those in Asia, with profound opportunities and risks. Although Korean-owned factories in China have helped boost exports, they also are diverting capital that could be used to further develop the domestic Korean economy, analysts say. Further, China is increasingly a direct competitor on the export front. Just as Korea is catching up with Japan in manufacturing of higher-quality cars and electronics, China is closing in on Korea.

With the growing Chinese challenge, South Korea must become more self-sufficient and diversify its economy with a stronger financial system, growing tourism sector and promising biotech and science centres, analysts and policymakers say. All of this, they say, requires massive investments, entrepreneurship and sound financial and corporate management.

Thus far, China has been a double-edged sword for South Korea. Last year almost half of South Korea’s $8 billion of foreign direct investments went into mainland China. Most were for manufacturing operations.

—Dawn/LAT-WP News Service