S. Korea a Model Student in U.S. School of Economics

Heightened tension with North Korea during President Clinton’s just-concluded trip to Seoul has obscured a key economic point: The administration has a huge interest in South Korea’s successful turnaround in order to justify its policies in crisis-hit Asia.

More than any other country in the region, and certainly more than Japan, South Korea has been a model from the U.S. perspective. It has accepted International Monetary Fund medicine even when the prescription was questionable, moved to reform and recapitalize its outdated banking system, and taken steps to expand democracy, open markets and be-gin dismantling bloated companies and crony capitalism.

Granted, South Korea still has a long way to go. But it has taken several serious and politically difficult steps. If America’s brand of cowboy capitalism and free-market ideology is going to work anywhere in East Asia, it will be in South Korea.

“The United States looks to Korea for its leadership in maintaining and expanding open markets during Asia’s economic difficulties,” Clinton said this weekend in Seoul. “[And] President Kim [Dae Jung] is one of the world’s most eloquent advocates for the proposition that democracy and prosperity must go hand in hand.”

That advocacy is particularly important to the Clinton administration at a time when it faces rising criticism at home and abroad.

At home, Clinton faces heat from those on the right who fought hard to tie IMF funding to antiabortion policies and from those on the left who see rising trade deficits and a flood of imports undermining American workers.

“Clinton would like to show the success of Korea,” said Jeffrey Jones, president of the American Chamber of Commerce in South Korea. “It’s no accident he’s coming here after the whole IMF debate.”

Abroad, meanwhile, the U.S. faces growing opposition to its open-market policies, as seen by Japan’s recent move to kill an Asia-Pacific Economic Cooperation conference trade deal and Malaysia’s campaign against free capital flows and American hedge fund activities.

The U.S. has squashed most recent Asia-wide economic initiatives it isn’t part of, including Malaysia’s proposed East Asia Economic Caucus in the early 1990s and Japan’s more recent Asia Monetary Fund idea. In that context, South Korea’s vocal support for the U.S. position in APEC last week did not go unnoticed.

A recovering South Korea would also help strengthen the U.S. argument that Washington’s economic recommendations work anywhere, not just in Anglo-Saxon nations, as some Asian countries have claimed.

Beyond that, the U.S. has some more parochial reasons for extending particular support to this troubled Asian tiger. South Korea was the fifth-largest U.S. trading partner and a major buyer of American farm products until it fell off the cliff.

Strong American farm exports in particular translate into jobs and votes, so a resumption of those trade flows is important for Democrats moving toward the 2000 presidential election.

“Wheat prices are at a 52-year low because of the Asian crisis, including problems in Korea, our fourth-largest [farm] customer,” said Rep. Earl Pomeroy (D-N.D.), who accompanied the president.

But Clinton was also careful during the visit to temper his support for South Korean economic policies with well-targeted calls for Seoul to move faster in several key areas, such as corporate reform.

This is because, despite cries from U.S. auto and steelmakers, most Americans haven’t focused on the weakening of U.S. exports that has followed the collapse of Asian currencies. They’ve had little reason to do so as the decade-long U.S. recovery chugs on. But that could change quickly at the first serious sign of a sputtering U.S. economy and rising unemployment, as Americans start looking for someone to blame.

Between the lines over the summit weekend were clear administration warnings to South Korea and the rest of East Asia to use self-restraint and pay close attention to the American political mood for everyone’s sake.

“America’s trade deficit is rising, and rising rapidly,” Commerce Secretary Bill Daley said. “You have to be concerned with a possible backlash back home and the move toward more protectionism.”

Ultimately, the greatest ingredient of a South Korean economic recovery, however, may be beyond Seoul’s control--a healthy Japan. Japan, as the second-largest economy in the world and the largest by a long shot in Asia, is the key to any sustained regional turnaround.

Yet here too, South Korea may eventually play a key role. If South Korea beats expectations, the U.S. might be tempted to trumpet this success in justifying why Japan should end policies that coddle small, inefficient companies.

While Tokyo will probably balk at admitting it can learn much of anything from Seoul given the often contentious relationship between the two, South Korea is out in front this time in adjusting to global change.

That’s largely because South Korea doesn’t have much choice. Seoul desperately needs foreign investors to counteract its domestic credit crunch. And because it lacks Japan’s extensive wealth, it hasn’t been able to safeguard jobs at almost any cost. Japan, in contrast, continues to spend gigantic sums on public works projects in a desperate attempt to avoid substantive deregulation. Most economists believe, however, that it will eventually have to take the plunge.

South Korea’s economy has not yet bottomed out, although it’s no longer in free fall. The nadir could come during the first half of next year, at which point there could be growing domestic pressure to slow the reform process.

Washington threw Seoul a few ceremonial gifts on this trip, including an increase in U.S. trade financing and an initiative on electronic commerce and the year 2000 computer problem. What South Korea is most in need of now, however, is a resounding vote of confidence from foreign investors.