The financial crisis that began in the United States is hitting emerging markets hard and raising fears of increased protectionism in wealthy countries.
South Korea‘s stock market and foreign exchange reserves have plummeted in the past month, a pattern repeated from East Asia to Eastern Europe.
The impact has been to drive up the dollar against other currencies, making U.S. products more expensive and undermining the American export sector, one of the last bright spots in a sluggish economy in recent months.
“The risk is that too many countries are left in a position like South Korea” where the currency, the won, has dropped 6 percent against the dollar in the past month, said Brad Setser, a fellow at the Center of Geoeconomic Studies of the Council on Foreign Relations in New York.
Singapore has entered a recession, and nations such as Ukraine and Georgia have been forced to seek help from the International Monetary Fund (IMF).
Growth has slowed in the biggest regional economic engines, China and India, though economists still expect them to expand by 6 percent to 7 percent and 8 percent to 9 percent respectively next year. Pakistan may be forced to turn to the IMF.
“Korea is so far the hardest hit … in terms of volatility and degree of bear sentiment toward the economy and currency over past months,” said Joseph Lau, chief Korea economist for Credit Suisse.
South Korea’s foreign exchange reserves fell by $27 billion in October, while the stock market plunged nearly 30 percent.
Lee Tae-sik, South Korea’s ambassador to the United States, said the country was coping well and that he hoped the crisis would not jeopardize a U.S.-South Korean free-trade agreement yet to be ratified by the U.S. Congress.
“What we should not do is revert to protectionist economic policies,” Mr. Lee told editors and reporters of The Washington Times on Monday. “Unless we have free trade and open economic interaction, the world economy will contract further and further.”
South Korea is particularly vulnerable, said Yoon Deok-ryong of the Korea Institute for International Economic Policy.
“The contribution of trade to our GDP is over 70 percent,” he said. “Because of that, our economy is very sensitive to economic relations with other countries.”
The U.S. Federal Reserve recently approved a $30 billion currency swap to help South Korea service its foreign debt of more than $400 billion. South Korea also announced a $10.5 billion economic stimulus package and enacted three central bank interest rate cuts to calm the financial and foreign exchange markets.
A decade before this latest crisis, the South Korean banking and corporate sectors were savaged by an Asian financial collapse, leading to a $58 billion IMF bailout.
In 1999, the country’s investment trusts were devastated after the $80 billion fall of the giant Daewoo Group - the world’s biggest bankruptcy at the time.
Just when the South Korean economy was rebounding and consumers were splurging, a 2003-04 crisis almost destroyed the country’s credit card sector.
This time, protesters in the streets have not been decrying America but turning their anger instead against the South Korean government.
“The low-hanging fruit is to go after [South Korean President] Lee Myung-bak,” said Tom Coyner, Seoul-based author of “Mastering Business in Korea.”
Mr. Lee came to power in February boasting strong economic credentials but faced mass demonstrations against American beef imports, and his credibility has dwindled.
Comedians have dubbed Mr. Lee and Finance Minister Kang Man-soo “LeeMan Bros,” a reference to the failed U.S. investment bank.
The crisis has had minimal impact on Koreans who do not own stocks, but is expected to cause widespread pain as exports drop and a credit crunch hurts small and midsized businesses. Some fear that the nation’s bellwether construction sector faces bankruptcies.
In last year’s presidential election campaign, Mr. Lee had promised a 7 percent annual growth rate. Most analysts expect next year’s figure to be about 3 percent.
There is some grim satisfaction that the crisis erupted this time in the United States. For a decade, U.S. pundits have criticized South Korea’s “crony capitalism” and urged Seoul to adopt the more competitive and less regulated U.S. economic model.
Now officials say a more prudent regulatory regime is essential.
“One of our beliefs is that U.S.-type regulations did not successfully function and that has been one of the main causes of the recent financial turmoil,” said Lim Seung-tae, secretary general of the Financial Supervisory Commission. “The failure of the U.S. and its experience will be a most precious lesson for Korea.”