“IMF crises” 2.0

By Alex Gratzek

*Please note, in Korea it is referred to as the IMF Crises while in most of the rest of the world calls it the 1997 Asian Financial Crises.*

Twenty years ago, South Korea experienced the “IMF Crisis.” The contagion, spreading from Thailand, affected much of the rest of Southeast Asia and moved on to South Korea. The impact was brief but deep.

More recently, Korea was largely able to escape the worst of the 2007/2008 crisis. As a nation largely dependent upon trade, Korea needs to prepare for the next crisis.

In 1978, under the leadership of Deng Xiaoping, China embarked on a mission to grow its economy, allowing it to operate along increasingly capitalistic lines. However, it has never fully embraced capitalism and the state retains a large presence in the economic sector.

The decision to adopt “pseudo” capitalism has led to an unprecedented 40 years of uninterrupted economic growth, allowing China to become the second-largest economy in the world. Oftentimes, this growth rate has exceeded 10 percent while in recent years it had slowed to 6 percent.

This is a remarkable achievement but one that comes with costs that have yet to been paid. The Chinese government has come to stake its legitimacy on delivering economic growth. To this end, it has consistently intervened in its economy to ensure this. The time for a recession is long overdue. The longer one is artificially avoided through government machinations, the more drastic any eventual recession will be.

In recent years, the government has only been able to ensure economic growth by utilizing debt to promote it. This is becoming an increasingly expensive and perilous way of ensuring growth. The amount of debt that is needed to ensure growth is increasing in proportion, while the extra growth that is generated is shrinking. The input (debt) costs needed to create a fixed amount of growth (output) are increasing.

State companies have seen their debt load rising in recent times. With access to government officials, they have been consuming government loans in order to stay afloat, and have avoided laying off workers for the sake of stability. Their proximity to power means they can access loans and pay a lower interest rate than the market dictates. Increasingly, new loans are being used to pay off old loans while banks are reluctant to report loans as nonperforming. This is not a sustainable practice.

Another related issue of concern is the housing market which has been encouraged as a means of maintaining economic growth via construction. This market witnessed prices double between 2010 and 2017. Housing prices posted a double digit increase in 2016. Chinese capital controls prevent money from being invested abroad and many Chinese are weary of the domestic stock market. Money left in bank accounts receives a pittance of interest. Therefore, many Chinese with money to spare have parked their money into housing.

This accounts for the dramatic rise in the price of apartments, and many speculators and individuals own multiple units. Outside of major cities, there are so-called ghost cities in the interior ― fully constructed cities but with populations well below maximum capacity.

The one child policy and the cultural preference for males resulted in a skewed gender ratio in which males outnumber females. Bachelors know owning a house is a minimum requirement in order to be considered marriageable material to any potential partner.

Any resulting coupling will be two young adults with no children. Thanks to China’s former one child policy, which started to result in a shrinking population, married couples will stand to inherit two or more houses from their respective parents while already owning their own. This will ultimately crash the housing bubble if it hasn’t crashed before then. A couple owning three or more apartments will inevitably sell them; especially if a debated property tax is put into effect.

The Thai crises originated from the economy needing more and more money as asset bubbles grew within the country. Those who were able to acquire bank loans were those with access to the center of power. A key component of this bubble was real estate speculation. This is being mirrored in China at this time.

A key characteristic of capitalism is inevitable recessions. Forty years of uninterrupted economic growth is not a natural outgrowth of capitalism but a reflection of government intervention during bad times. Eventually, this will no longer succeed and Korea needs to be prepared for when it does.

The “IMF crisis” originated from a small economy in Southeast Asia before spreading throughout the region and to Korea. The 2007-08 crisis occurring across the Pacific, allowed Korea to escape the worst of the fallout. Korea was also spared because China, its largest trading partner, went ahead with government intervention to ensure economic growth.

It is not inevitable that China will suffer a recession. Its efforts at pursuing reforms to clean up its banking system along with an attempt to rein in the housing market could work. However, Korea needs to be prepared in case China fails in these endeavors or some other unforeseen event causes a recession.

China is the largest trading partner of South Korea, accounting for around 25 percent of South Korea’s exports and is the second-largest economy in the world. Any Chinese economic issue will dwarf the 1997-98 crisis in its impact, while South Korea will not be able to escape unscathed as it did in the 2007-2008 crisis. As the bible says, in times of plenty save for the bad times. I hope Korea has done so.

Trump’s March of Folly

By Alex Gratzek April 23, 2018
Originally in The Korea Times

Early last month, President Trump shocked his advisers, North Korea, South Korea and the rest of the world by accepting an invitation to meet Kim Jung-un.

The sudden acceptance was such that the South Korean envoy had to phone President Moon to secure his blessing to make an announcement at the White House. At the time, the North Korean media failed to mention anything related to this.

This is not in the best interests of any parties involved and should be postponed until a later date. The sudden acceptance is a hallmark of Trump’s style, an impetuous audacious move that puts himself at the center of attention. The ability to be the first president in office to meet the leader of North Korea may have proven irresistible to Trump. This style may work in the world of real estate, but in the arena of global diplomacy it could prove disastrous.

Meetings between heads of state are usually the culmination of communication that has been carried out over long periods _ by having contacts at lower levels progress on issues, while a strong relationship is developed. Eventually this allows for the heads of state to meet for a grand finale with no unforeseen surprises.

If lower level officials are unable to work together, then the respective leaders will not meet, no face is lost, and whatever issues that remain unresolved are not thrust into the limelight as an inscrutable problem.

Trump’s sudden announcement has turned this on its head. With little time for any meaningful buildup between lower officials prior to any meeting between the two, the chance of a comprehensive fruitful meeting seems small.

What chance there is for success is lessened by the recent addition of John Bolton and Mike Pompeo to the Trump administration. Both are hawks who advocate pre-emptive military strikes against foes and the tearing-up of the Iranian nuclear deal. This hostility to the Iranian deal serves to undermine American sincerity in any negotiations concerning the same issue with North Korea.

If they do meet, it is certainly possible a deal could be struck; but only to see Trump later backtrack on it. Trump has been known to make agreements without the input of his advisers, and if a deal were agreed to, which in hindsight Trump believes to be too beneficial to North Korea, he could very well dismiss it.

Domestically, Trump has “agreed” to various deals and proposals only to renege shortly thereafter. This is a behavior that can’t be tolerated when dealing with foreign nations on such a sensitive issue.

With the chance of a deal already low, and Trump surrounded by hawks, it could prove a tragedy. If negotiations were to fail, Trump would not be able to kick the issue down the road any further or to lower level subordinates. His ego and image would not allow it _ after all he has built himself up as a hard negotiator and a tough guy. He would have lost face and would know only one way to regain it.

Those around him such as Bolton and Pompeo would be arguing for a pre-emptive strike. They would hold that a shot was made at diplomacy; it didn’t work so that leaves only two options _ a limited strike or a full blown war. The fact that North Korea has recently brought a new reactor online would be used as evidence that they didn’t even enter the negotiations in good faith.

Furthermore, they would press for either option as having been a better one than yesterday, and a better option today than in the future, when North Korea will have further improved its missile and nuclear technology.

So far, progress has been choreographed by President Moon Jae-in. He needs to stay in the driver’s seat in order to prod negotiations along at a slower, more reasonable pace. He played Trump like a fiddle in tickling his ego in giving him “credit” for creating the conditions for establishing contact with North Korea.

Trump should not be allowed to meet Kim at all if no deal seems possible. If they meet and there is no breakthrough, Trump would not be able to kick the can down the road anymore. A meeting should only be planned when the semblance of a deal has been reached.

Then, Trump can be brought in for a photo op for the ceremonial “completion” of negotiations and take credit. The world will know where the real credit for any deal will lie. The meeting of the two in any other circumstances should not be allowed as the potential fallout is too high.

Hope for new round of talks

As the Winter Olympic Games begin to recede into history, the realities and difficulties of inter-Korean relations have returned as the forefront news story of the Korean Peninsula.

Notwithstanding the successful mini-thaw in relations, the difficult part is ensuring its continuation as the intoxication from the united Korean Olympic team fades and reality returns.

With recent developments, it appears as if serious negotiations concerning the North’s nuclear program will come to fruition.

North Korean leader Kim Jong-un has dropped his bellicosity and threats of missile launches issued in response to the joint South Korean-American military exercises at the end of the Olympics, and Kim has expressed an understanding of the need for them.

Perhaps it is understood his lack of reciprocal gestures concerning the North’s military parade on the eve of the Olympics didn’t give North Korea a leg to stand on, when it came to calling for the cancellation of the already postponed military exercises. His reasonable response is hopefully a sign North Korea will be serious in the negotiations to come.

If North Korea wishes for the exercises to be canceled, it should request that while following through with a gesture instead of issuing threats. Such actions would be a basis for the cancellation of such exercises; threats are not.

There is no shortage of gestures that come to mind. The North could apologize for its many transgressions against South Korea ranging from the death of a South Korea civilian at the Mount Geumgang Resort in 2008, to the sinking of the Cheonan, the artillery bombardment of Yeonpyeong Island in 2010 or for cheating on the 1994 Agreed Framework deal. Any of these actions would be the least North Korea could do, as words come cheap.

However, action speaks louder than words. If North Korea wishes to make a sincere gesture in order to forestall the scheduled drills, it could allow in the IAEA to inspect its nuclear sites and other infrastructure, or stop propagandizing as a victory any envoys who visit, as was done with the most recent envoys sent by President Moon Jae-in. Such actions might sway the minds of even the most skeptical North Korean observers.

North Korea has stated it will refrain from missile and nuclear tests as long as talks are forthcoming. It is a sad state of affairs when “good behavior” for North Korea is not threatening its neighbors, which is considered normal behavior in most of the rest of the world.

Despite the positive developments, feelings of euphoria should be kept in check. After all, negotiations have been ongoing with the North for nearly three decades and every time a deal has been reached, the North has cheated or broken it.

The 1994 framework unraveled in 2002 when it became apparent the North had been carrying on with an illicit nuclear research program, and the 2012 Leap Day Agreement unraveled within a month due to the continuation of missile tests it prohibited.

What is important to remember is this new round of talks has had its pace and tempo controlled by North Korea. The most recent round of activity came from Kim Jong-un’s New Year speech.

No serious attempts at talks were held with either former Presidents Lee Myung-bak or Park Geun-hye. It is not inconceivable to think of the North as attempting to take advantage of President Moon’s desire for talks in a bid to draw South Korea away from the U.S. by portraying itself as a reasonable party seeking negotiation, while President Donald Trump comes across as a blowhard.

As negotiations are entered, it is imperative to make no concessions until North Korea has made its own. In this way, it can be determined if the North is genuine in its desire for improved relations, or if it is another attempt at easing the most stringent of sanctions it faces.

For too long, concessions have been going down a one-way street to the benefit of North Korea. Too often these are given and the North Korea uses these feel-good times to ease sanctions for its own advantage, while the status quo in relations remains the same.

The end result is the temporary easing of sanctions while in the long run the stage is set for a new round of sanctions when Pyongyang inevitably starts to act up again.

As an English teacher, I teach my students English conversations are like table tennis. One can’t talk alone just as one can’t play alone.

The ball is on North Korea’s side of the table; what happens next is up to it. So far concessions have only gone one way. It’s up to North Korea to return the ball to the South Korean-American side of the table in order to lay the groundwork for serious dialogue aimed at improving relations.

Any presidential visit or envoy sent to Pyongyang needs to be earned, not given. Any threats or attempts at blackmail should be cause for the termination of negotiations. When one deals with a petulant child, one does not give in to the child’s demands.

By giving in, it lets the child know its bad behavior will always result in the outcome it desires. The same goes for the nation child that is North Korea. That said, this author hopes the newest round of discussions will bear fruit.

The absurdity

By Alex Gratzek – Originally published in The Korea Times

Instead of writing about my usual topic of current events, this column is more about some of the absurdity of everyday living I have witnessed living in South Korea.

One thing which absolutely drives me bananas in South Korea is the manner in which bananas are sold. I love eating a good banana. Ideally, I’d eat three to four a week but in Korea this isn’t possible.

When I was first in Korea years ago, I tried to pull off three or four bananas from a bunch of 10 bananas. The ajumma started yelling at me; I could buy zero or 10 bananas. Being single and living alone, 10 bananas were too much.

I visited that ajumma and bought my fruit and vegetables from her for years but I never bought bananas from her. Periodically, she would try to give me bunches of bananas which she couldn’t sell because they were turning from yellow/brown to brown/black. I would refuse them.

Those bananas she couldn’t sell were a total loss for her. I can’t fathom why grocery stores and little ajumma stores won’t sell bananas except in large quantities but at the other end of the extreme you can go and buy an overpriced single banana at Starbucks for 1,500 won or so. Where is that nice middle ground between buying one banana and 10 bananas? It’s bananas.

Another thing which is a bit absurd in Korea is the recent renovations done in my neighborhood, Haebangchon. It was a fine plan, make the roads narrower and put in some sidewalks for the benefit of local residents.

However, the newly narrowed roads eliminated parking opportunities so now the sidewalks are constantly overrun with illegally parked cars. One evening, walking down Haebangchon I counted over 20 cars parked on the sidewalk.

Now, where is the enforcement? There is very little but there is an easy solution. Being a regular in Haebangchon I often see older people collecting bottles, cardboard and other recyclables in order to supplement their income.

How about equipping them with smartphones or a number to call in order to report the illegally parked cars? For their efforts, give them a percentage of the ticket as payment. In no time at all, the illegally parked cars will be gone and older folks will have some extra income in the meantime.

The last thing I find utterly mind boggling about South Korea is the taxi situation. Recently, taxi drivers protested by going on strike against a carpooling service that was to be offered by Kakao Mobility because it would be a threat to their livelihoods.

Taxi drivers are also against the extension of subway hours because it’s a threat to their livelihoods. When Uber made its debut in Korea, it was quickly run out because it posed a threat to the livelihood of taxi drivers.

I would have some sympathy for taxi drivers and their seemingly incessant protests and strikes if they actually did their jobs. However, they don’t. A taxi driver’s job is to pick up people who are hailing them for their services. The amount of times I have been refused service is staggering.

In short, carpooling? No! Uber? No! Extended subway hours? No! Pick up customers waiting on the street? No!

In Itaewon, I knew a taxi driver who would come out every weekend night around 11:30p.m. He would proceed to then just sit in Itaewon drinking 300-won cups of coffee waiting for a specific customer who wanted to go to Incheon.

He would be sitting there for hours doing nothing except talking to other taxi drivers who were waiting on the same kind of fare. Knowing him a bit, I would often ask him for a quick five-minute ride home over to Haebangchon. He refused every time, for months.

In the Haebangchon and Itaewon area, taxi drivers will often see people waiting in the street for a taxi. They will slow down, lower their windows and see where you are going. If it’s not far enough, they will drive away. If they are willing to do it, then they will unlock the doors and allow you in.

This is absurd. A taxi driver’s job is to pick up customers and take them from point A to point B, regardless of the distance. If taxi drivers make so little money, then they should be willing to pick up anyone who is willing to pay for their service instead of constantly discriminating against potential customers.

However, more often than not, there is some excuse why they can’t take you and when alternatives arise because of taxis’ shoddy service, they protest.

After living in Korea for eight years, bananas have been driving me crazy and taxis have been driving me bananas. I just had to get all of this off my chest.

North Korea needs to show sincerity

By Alex Gratzek

A look at The Olympic Truce- past and present

As the Winter Olympic Games proceed, many Koreans are becoming euphoric at the spectacle of the two Koreas’ participating together as one. This led to hopes that the event will lead to inter-Korean talks, ultimately leading to a breakthrough in relations after decades of animosity.

However, a mere spectacle such as the Olympics is not sufficient grounds for such hopes, let alone any trip by President Moon Jae-in to Pyongyang for a summit with North Korean leader Kim Jong-un.

Any talks of such a trip to North Korea should be put on hold. Pyongyang is using the symbolism of the Olympics and emotional appeal of a united Olympic team to make the case for a presidential visit and talks, when what is needed is a sincere effort on their part to lay the foundation for meaningful negotiations.

Many are holding great hopes for an easing of tension and for dialogue with North Korea because of the traditional Olympic truce. This truce dates back to the original Games.

During ancient times, a truce was established before and during the Games between the different Greek city-states in order to allow spectators and athletes to travel freely to the Games. However, a quick look at history shows that North Korea has not honored the spirit of the Olympics in the past and is not doing so in the present.

The last time South Korea held the Olympics, North Korea bombed a South Korean flight in 1987 killing all 115 people aboard. It is believed this was done in an attempt to tarnish the 1988 Summer Olympics by scaring off foreign athletes and spectators. No apology was ever issued.

For the 2018 Games, South Korea and the United States postponed their joint annual military exercises until the completion of both the Olympics and the Paralympics.

However, North Korea went ahead and hosted a large military parade showcasing 130,000 soldiers and its many missiles which it uses to terrorize its neighbors. It is surely no coincidence that this parade occurred on the same day as South Korean held a welcoming ceremony for foreign athletes, a day before the opening of the Olympics.

North Korea is using the Games for its own ends, not for the pursuit of meaningful dialogue with South Korea and by extension the rest of the world. Much has been made of the visit by Kim Yo-Jong, the sister of Kim Jong-un, who extended her brother’s invitation for President Moon to visit Pyongyang.

What is important to keep in mind is that this invitation was delivered by the director of the Propaganda and Agitation Department also known as Kim Yo-jong. The invitation is an attempt to cause an easing of sanctions that have steadily grown tighter by drawing South Korea into direct discussions.

If President Moon were to visit the North, it would be a North Korean propaganda victory domestically, amplifying its stature in the world while internationally it could serve to weaken the increasingly stringent sanctions.

Two former South Korean presidents visited Pyongyang in 2000 and in 2007 with no lasting improvement in relations, and nothing to show except broken promises for reciprocal visits to Seoul.

If North Korea were genuine in its desire for dialogue and visits, it would have postponed its military parade as a show of good faith as did the Americans and South Koreans with their military exercises.

Visits to and talks with North Korea are an admirable goal, but to let the North control the tempo of when and where these occur is a mistake, as it has consistently used them to gain concessions while returning nothing concrete, except for brief periods of feel-good times.

President Moon should refuse to visit North Korea, and substantive talks should not be held until the North makes a gesture of its sincerity. Fielding a unified team and sending cheerleaders is not such a gesture.

If North Korea refuses to make such a gesture, then it is quite evident this is yet another cynical ploy to take advantage of South Korea’s hope for eventual reunification, for its own gain. One often hears of insanity as doing the same thing over and over while expecting a different outcome. What makes this time any different?

Moving beyond the past

By Alex Gratzek – Originally published in The Korea Times

It’s been said that history repeats itself. This isn’t true. No two events in history are ever the same but that doesn’t mean we can’t look back to the past to draw lessons for the future. As 2018 ends and 2019 begins, it’s time to look back at the past in the hopes that we can move beyond it for a better future.

In 1870, the Franco-Prussian War began. This would be the first of three wars between the two nations which would tear Europe apart. Prussia won and unified the various German states to become Germany as we know it. In the aftermath of its victory, Prussia made France give it the lands of Alsace and Lorraine and pay a large war indemnity.

These seizure of lands proved to be a sticking point for future relations as France was determined to regain its lost lands and Germany was convinced that France was a mortal enemy.

France, bitter at defeat and the loss of lands, bided its time for revenge. It spent the next 44 years preparing for war. It expanded and modernized its army, gathered allies and spent inordinate amounts of money preparing for the next conflict. Germany did the same.

In 1914, the French chance for revenge came with the advent of World War I. The war raged on for four years resulting in around 20 million dead, countless numbers of wounded soldiers and the equivalent of trillions of won spent to finance the war.

In the aftermath, a peace was imposed on Germany. The lands it had seized from France in 1870 were returned to France, and it was now forced to pay war reparations as the entirety of blame for the war was placed squarely on Germany’s shoulders.

The peace wasn’t lenient enough to ensure good relations nor harsh enough to keep Germany forever weakened. One French general commented that this was no peace, but only a truce for 20 years.

Sure enough, 20 years later World War II began. This war was even more destructive than the first. A staggering 70-85 million soldiers and civilians died. After this war, both Germany and France were exhausted. Three wars in less than 70 years will do that to a country. Only then, did the two stop imposing draconian peace treaties and war indemnities on each other and instead put aside their differences to work together.

They worked together to create the European Coal and Steel Community to promote trade and economic cooperation. This eventually evolved into the European Union. Today, the continent of Europe is finally at peace after over a thousand years of war.

As an American, it is interesting to see how much Japan and Korea seem to hate each other. Both nations are heavily industrialized trading democracies in the same region who face some shared threats. Instead of having a dialogue to address these threats and work for a better future, it seems relations are never able to progress because of conflicts from the past.

Japan did horrible things to Korea, as well as to America and many other countries. My grandfather’s brother was shot down and killed by the Japanese at the Battle of Midway in 1942.But what’s important to remember is that the ones who did these terrible things are all dead.

Now I ask you, should the bad deeds of people born over 100 years ago, who are long dead, continue to poison relations between Japan and Korea now? Must the children of sinners be held responsible for the deeds of their forefathers?

It is important to remember the past but not be beholden to it. There are too many issues facing the world today which require cooperation to solve; global warming, nuclear proliferation, threats emanating from North Korea and cyber terrorism to name but a few.

Korea should never forget the past and it doesn’t even need to like Japan, but as neighboring nations it is important that they work together to build a better future. If they can’t cooperate and get along, then maybe Europe’s destructive past will be Asia’s future. I sincerely hope this isn’t the case and that Korea and Japan can learn from the tragic history of Europe.