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South Korea hangs in the balance

By Alex Frew McMillan
CNN Hong Kong

roh moo-hyun
Roh is looking to follow outgoing Kim and pledges to continue his push to reform the chaebols

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SEOUL, South Korea (CNN) -- South Koreans go to the polls this Thursday with plenty on their minds -- political tension with North Korea, rising anti-American sentiment and the question of whether economic recovery can be sustained.

The vote is currently too close to call between Roh Moo-hyun, the candidate from the ruling liberal party, and his conservative opponent Lee Hoi-chang. (Profile of Lee)

On the economic front, the candidates have clear differences. Roh pledges to force South Korea's chaebols, or conglomerates, to reform. (Profile of Roh)

That's a cause incumbent Kim Dae-jung has championed, after chaebols such as the Daewoo and Hyundai groups ran up huge debt loads during the Asian financial crisis.

Difference from Japan

Kim, who is unable to run for another term under Korea's electoral rules, has won high praise from the International Monetary Fund and other overseas bodies for his efforts.

lee hoi-chang
Lee says the 'Sunshine Policy' has failed and advocates a tough stance on dealing with North Korea

Thanks to such moves, South Korea is posting solid growth and is often contrasted to Japan, which has labored to change its private sector for a decade.

Korea is on track for 6 percent growth this year, and likely to hit that again next year.

"In the same way that the Korean economy was an outperformer in 2002, we expect this to be the case again in 2003," investment bank ING wrote in a recent report.

Lee is expected to introduce policies that are more favorable to big business and the chaebols -- although he, too, claims he will continue to push reform.

James Paterson, head of Korean research for investment bank CLSA, told CNN that the treatment of the chaebols is the main difference in their business platforms.

"How wide that divergence remains to be seen," he said. "They're both talking in increments, about gradual reform."

New jobs on platform

Lee says he wants to create 2.5 million jobs by investing in education and technology, and to rationalize the tax system. He says he will push tax cuts for low-wage groups.

For his part, Roh says he will instigate the five-day work week and improve benefits for the working class.

There are causes for caution, despite Korea's solid economic progress. Business and consumer sentiment both fell in September and October, having peaked in the northern spring.

Household credit a problem

There are also concerns about the high level of consumer debt in South Korea. Credit-card spending has caught on, driving Koreans to overextend themselves.

Household credit rose by 6.1 trillion won in October. But regulators appear to have acted early enough to ward off any serious problems.

How many young voters get out to vote will be key to the election, with anti-American sentiment rising

The government has toughened its stance on credit-card debt and property speculation, causing banks to get more cautious. Household credit growth slowed to 2 trillion won, a decline of 68 percent, in November as a result.

"To the credit of the regulators, they've been particularly proactive about how they're tackling this consumer cash bubble," Paterson said. "The regulations they've brought in are going to crimp the earnings of the credit card issuers and prevent any fallout to the economy."

A total of 77 percent of all consumer lending by Korea's banks is secured by real estate, ING said in a November note to clients, meaning a financial crisis is unlikely.

"We still believe the combination of market forces -- borrowers becoming 'maxed out' -- and regulatory pressure will avert a household credit disaster," the report stated.

Politics to decide

The political differences between the two candidates may be the decider. Roh is keen to pursue Kim's "Sunshine Policy" of opening up toward North Korea. Lee sticks to a much harder line, saying that policy has failed and promising to crack down.

Roh also says he will reposition South Korea's relationship with the United States, which has 37,000 troops in the country. He says he will not "kowtow" to the United States and is appealing to the rising anti-American sentiment.

That sentiment was fueled by the recent death of two girls killed in an accident involving U.S. servicemen. A U.S. soldier was attacked with a knife during a demonstration in Seoul this weekend. (Full story)

Lee's tough stance on North Korea would push him to look for continued U.S. support and says Roh cannot deal effectively with Washington.

"It's the youth vote who have been manifesting this anti-Americanism," Paterson said, with the youth favoring Roh.

"The result will hinge on how much of that youth vote gets out on the streets and votes -- that may be the deciding factor."

Xie: 'Not so fast!'

There is a danger ahead for whichever candidate wins Thursday's poll.

Andy Xie, East Asian economist with Morgan Stanley, says he believes South Korea can only sustain growth of 3 to 4 percent, not the 6 percent it has achieved in the past.

"Korea is becoming more dependent on domestic demand for growth, which has less room for productivity growth," he said. "If Korea tries to grow faster, it will create imbalances in its balance sheet and cause big economic downturns during the adjustment afterwards."

South Korea is also highly dependent on oil imports, which could be disrupted by a U.S. war in Iraq. (Full story)

The politicians continue to push for 6 percent growth, Xie warned, meaning there is the possibility of economic bubbles developing in the future.

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