Why you should care

Because many countries are trying to crack the code on how to sustain a strong economy after their surge of growth fades.

Don’t blame Yongho Lee if he’s grown tired over tires — blame his homeland, South Korea. The overseas sales manager for the Korean tire-manufacturer Nexen Tire recently flew to China, where he found his business was getting squeezed by the slowdown of car sales there, not to mention the global threat as Chinese companies dump cheap tires in other countries. He’s also flown to Russia to save his company’s loss-making business there, but he can’t raise the price of his tires because of stiffer competition from the Japanese, who, Lee says, are “giving us difficulty in many countries.”

Like canaries in a coal mine, consider the deflated appetite for South Korean tires (or cars, high-def TVs or smartphones, for that matter) as early warning signs about the country’s economic woes. Home to blockbuster brands like Samsung, LG and Kia, and once the darling of the global development community — with nearly three decades of surging growth that averaged over 8 percent a year — South Korea is now increasingly seeing fiercer competition from rivals as its economic roar quiets to a peep. In fact, exports dropped 11 percent in the first half of 2015, according to the Bank of Korea, a period in which they also took their steepest monthly fall since the 2008 financial crisis. The central bank also recently lowered its growth forecast for this year to 2.8 percent, down from nearly 4 percent.

Chalk the drama up to the South Korean squeeze. On one side, China’s slowdown has sapped demand for South Korean exports. The yuan’s recent devaluation makes Korean imports even more expensive, which could further cut sales and also raises the specter of a 1930s-style trade war based on competitive devaluations. More threatening, though, is China stepping up the technology ladder. Samsung’s once dominant position in China’s smartphone market, for example, has been overtaken by the Chinese rival Xiaomi. Jack Joo K. Ree, an economist at the International Monetary Fund, notes that China is also aggressively pushing to develop so-called intermediate goods like electronic components that, so far, have been mostly imported from other countries. “This will have a disproportionate impact on Korea,” Ree warns. (Samsung didn’t respond to a request for comment.)

Today, South Korea is still stuck mostly in its old mold of a high-growth economy.

Across the waters of the Korea Strait, meanwhile, Japan’s economic upheaval has indirectly hurt South Korea by making its exports less competitive. Back in the day, South Korea used to undersell Japan in international markets, giving its exports of electronics and cars a nice price edge. But that’s become blunted as the yen has lost 40 percent of its value against the dollar since the Bank of Japan began stimulating the economy in 2011. The result? It’s becoming easier for Japanese companies to sell everything from cars to TVs, compared with their Korean counterparts. And if a cheap yen persists, says Ree, it’ll keep boosting businesses in Japan while creating headaches for those in Korea.

In some ways, this feels like a rerun of a bad historical movie, as this middle-ranking power is squeezed once again. In 1904, Russian commercial interests in Korea gave an excuse for Japan to march up the peninsula as a prelude to making Korea a colony. And that followed centuries of incursions from the south (Japan) or the north (China). More recently, it took two brutal wars — World War II and the Korean War — to free just the south of Korea, so it’s perhaps little surprise that South Korea is once again being pressed by its neighbors, only this time through an economic sandwich.

Today, South Korea is still stuck mostly in its old mold of a high-growth economy: It’s dependent on manufactured exports and dominated by huge, powerful industrial conglomerates, with few or weak small and medium-size businesses. Meanwhile, it’s held back consumer spending. And that model is running out of steam. If the problem sounds familiar, it’s because Japan faced something similar and has been suffering from more than two decades of economic turmoil now. “Korea is coming along in a similar path, years behind Japan,” says Charles Kimball, managing director of the Korea Center for International Finance, a Korean agency that provides an early warning system for financial crises.

Still, Korea’s fate is far from sealed. The country boasts a big war chest and record foreign exchange reserves of $375 billion, and it isn’t likely follow the path it did in 1997, when Japanese banks were under pressure in Southeast Asia and plunged Korea into crisis by suddenly cutting credit lines. “It doesn’t have to follow the path of Japan,” says Philip Suttle, director of global economic analysis at asset manager Tudor Investment Corporation.

Korea could, for example, find ways to boost small companies, and encourage the growth of a vibrant service sector. Perhaps the most important, yet toughest, step would be to break the stranglehold of large conglomerates. The country also needs to open up competition and revamp the education system, Kimball argues. After all, he notes, “how do you encourage the best graduates from the best schools not to join Samsung” — and instead take the risk to make it big on their own?

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