Business as usual? A lesson from Korea

There is an assumption behind the government’s preparations for next week’s budget: that business as usual is on the way back. That is a risky assumption.

Sure, the unemployment rate fell. But the survey is “volatile” and unemployment benefit numbers fell only slightly. Far more important was the turmoil on the world’s “debt” markets.

On those and related markets, including for shares, it is not business as usual — at least, as “usual” used to be known. This is because there have been huge blowouts in governments’ debts and they are set to get far bigger still on the back of very big borrowing.

And for governments, as for individuals, there is a rule: you cannot borrow your way out of debt. Either you go bankrupt — repudiate your debts — or you earn enough to pay down the debt to a prudent level. The most more borrowing can do is buy time and there is a limit to how much time can be bought that way.

Greece got to the point where banks wouldn’t lend to it. Taxpayers elsewhere in Europe have rescued it for now. Its prospects are bleak.

That has turned the focus on Portugal, Ireland, Italy, Spain and Britain — even, possibly, the United States.

All those countries are “western”. Contrast China, a huge lender to western economies, and Singapore’s and South Korea’s strong growth. Their fiscal strength illustrates the transit of economic power now well under way.

With economic power comes geopolitical power. With geopolitical power comes the power to write the rules.

Largely unnoticed here, South Korea has joined the rule-writing club.

In short order it joined the Organisation for Economic Development (OECD), thereby declaring its economy “developed”, became an aid donor to poor countries, began contributing to international peacemaking and peacekeeping, joined the G20 and will chair its November summit and will chair the next disarmament summit in 2011.

It is challenging Japan for No 2 position in north Asia. And that is before it is reunited with North Korea.

Unification will pose large costs for the South. Economic and social conditions are far worse than in East Germany when it collapsed and the North-South income gap is six times wider than was the East-West Germany gap. And making a single Germany has been a long haul.

But unification also offers Korea opportunities: cheap labour, large mineral resources and an overland connection to China, where South Korea already has large investments and markets.

Unification is also potentially a trigger for tension, which could embroil New Zealand.

East Germany was cut loose by the Soviet Union and folded into a new Germany. But China and the United States (with us onside) fought a stalemate war over Korea’s division 60 years ago. The United States still has military bases in the South. China props up the North and last week hosted its decrepit leader, Kim Jong-il.

The North’s regime is fragile. It could suddenly disintegrate. If South Korea then takes over, China will suddenly have a United States ally on its border. Some South Korean analysts think China might feel it has to intervene.

How, then, would the United States respond? And Japan? Where would John Key, or his successor, position this country if the United States demanded support, as over Iraq? Duck and hope nobody notices? And then what would be the long-term implications for market access and free trade agreements?

Understandably, South Koreans would prefer — at least, as put to me in a brief visit last month — a transition by way of a modernising, initially autocratic, North Korea which gradually opens up. China would prefer that too, some analysts calculate. But even that route may generate tensions.

The lesson: the strategically benign environment New Zealand has enjoyed for decades — “incredibly benign”, Helen Clark mistakenly called it once– is not forever. It could go bad as suddenly as financial markets do when the fragile mechanisms that bind them fray.

But even if North Asia resettles peacefully, that does not return us to pre-2007 business as usual, Both in strategic security and in economic activity we are in a different frame.

That is the real challenge for Key and his government. Some close observers fear Wayne Mapp’s defence review is short on serious strategic “what-if” analysis, including of north Asia. Much of the pre-budget rhetoric has sounded like preparation for a recovery to what we used to think of as normal.

Actually, the setting for the review and the budget is a shifting environment. That demands imaginative strategic thinking, not MBA-by-the-book responses.

South Korea nearly went bust in the Asian crisis of 1997-98. Business-as-usual broke. Its response was to turn itself into a modern, sophisticated economy, with geopolitical outreach.

Key has talked of step-change. Next week’s budget is an opportunity.

* The Korea Foundation, an arm of the government, funded my visit. But most interviewees were suggested by outsiders or were themselves outsiders.