IBTimes Feature: After Half Century Of Development, South Korea Still An Emerging Market

Over the past three decades South Korea has catapulted itself up from Third World-level poverty to become a technologically superior economic powerhouse.

Indeed, like most advanced nations of the West and Japan, South Korea boasts highly liquid financial markets and a bounty of innovative, high-skilled workers who make everything from computer parts to automobiles. Also, like other advanced nations, South Korea is a democracy with a 99 percent literacy rate, low birth rate and an aging population.

But purely from an investment perspective, not everyone is convinced that South Korea deserves advanced country status.

For example, while Standard & Poor's and the London-based FTSE Group of indexers classify South Korea as advanced, the widely used MSCI indices -- which determine the portfolio holdings of a great many exchange-traded funds (ETFs) and mutual stock funds -- still regard South Korea as an emerging market.

Why this discrepancy?

Part of it has to do with the fact that different indexers employ different criteria in evaluating the economic strengths and weaknesses of countries.

Diane Hsiung, an iShares portfolio manager, explained that MSCI said South Korea would remain an emerging market due to its failure to meet the developed market accessibility criteria, because the Korean won is not a fully convertible currency and does not have an offshore currency market.

But is South Korea's economy sufficiently robust to be unharmed by this lack of consensus regarding its status?

I don't think investors are particularly concerned whether South Korea is labeled an emerging or developing market, said Sukhy Ubhi, a London-based economist at Capital Economics. The performance of the economy and financial markets are what matter to investors.

Ubhi added that foreigners account for about 30 percent of South Korea's stock market, and overseas investors are not shying away from the country.

However, there are clear signs that South Korean officials believe that the emerging market tag is unfair and potentially a drag on the country's ability to play an equal role in the global economic environment with developed nations. For one thing, South Korea hosted the G20 Summit in 2010 primarily to raise its international profile.

Moreover, South Korea became an Organization for Economic Co-operation and Development donor nation in 2009 -- one of 23 OECD members, including the U.S. and Japan, that made large donations to developing nations. Indeed, in 2008, South Korea provided overseas assistance valued at $800 million, or 0.09 percent of gross national income, for that year.

This step was taken, Ubhi said, to improve the country's image.

South Korea had been a recipient of financial support from the group from 1945 through 1995 (a period in which it received about $13 billion in aid).

International Business Times also spoke with two experts on Asia's economies to sort out the South Korean quandary.
Rebecca Jackson-Young and Fung Siu are London-based economists at the Economist Intelligence Unit's Asia team.

IB TIMES: Why do some analysts, economists and fund managers still classify South Korea as an emerging market when it is one of the wealthiest small nations on earth and boasts a stupendous export-driven economy?
JACKSON-YOUNG & SIU: At EIU, we categorize South Korea as an emerging economy in our Credit Risk Service to take into account the large size of the country's foreign currency-denominated debt.

IB TIMES: What does South Korea have to do in order to officially graduate to developed world status across the board?
JACKSON-YOUNG & SIU: The terms developed and developing have been overtaken, to a certain extent, by GNI per capita, which is Gross National Income divided by the size of the population. According to the World Bank, South Korea was classified as a high income nation (those that exceed a GNI per capita threshold of $12,276) with a GNI per capita of $29,010 in 2010.

IB TIMES: What do you see as the greatest risks facing South Korea's near-term, economic growth?
JACKSON-YOUNG & SIU: A dramatic economic slowdown in China, as it is South Korea's largest trading partner. But most of the exports from South Korea to China eventually find their way to final consumers in the U.S. and Europe -- so a dramatic downturn in both regions will adversely affect economic growth in South Korea.
The EIU currently expects a moderate slowdown in economic growth in China and for the euro area to contract by 0.7 percent in 2012.

IB TIMES: Is South Korea hampered by the constant military threats from its belligerent neighbor, North Korea?
JACKSON-YOUNG & SIU: Since its founding, South Korea's overriding external preoccupation has been with North Korea. The ironically named demilitarized zone that separates the two Koreas remains the world's most militarized frontier.
The 1950-53 Korean war is technically not over, as there is an armistice but no peace treaty, and U.S. troops remain stationed in South Korea. The threat of renewed aggression from that quarter, whether in the form of the North's alleged nuclear program, its stockpile of chemical weapons (said to be one of the world's largest) or its standing army of nearly a million, has never been wholly lifted.
Despite the threat, South Korea's economy has performed relatively strongly, particularly compared with Japan, expanding by an average 6.5 percent a year in 1990-2000 and by 4.6 percent a year in 2000-2010.

IB TIMES: South Korea is a principal trading partner of the U.S. But is Seoul looking more to China for its business deals?
JACKSON-YOUNG & SIU: From 2012-2016, South Korea's relations with China and Japan will be subject to volatility over a number of issues, but growing integration between the three countries' economies will continue to provide South Korea with a motive to sustain cordial relations with the other two nations.

IB TIMES: South Korea has an aging population like Japan and other Western countries. Does this pose a threat to its future?
JACKSON-YOUNG & SIU: Yes, South Korea's population is aging rapidly. Estimates from the National Statistics Office suggest that the share of the population over 65 years of age is currently more than 10 percent. By 2050, this proportion is expected to exceed 38 percent.

The impact of these changes on the economy will be severe. The rise in the number of people over the age of 65 will burden the public finances with ballooning health and social security costs. Moreover, productivity and economic growth will slow as the population ages. As more people retire and fewer younger ones take their place the labor force will shrink, meaning that output growth will slow unless productivity accelerates from its current rate. Since the remaining workers will be older than before, they may also be less productive. An increasing proportion of public spending will go towards pensions, health care and long-term care.