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South Korea's economy has a Pyongyang problem

Seoul's focus on nuclear deal distracts from challenging domestic issues

A feat or another distraction? People at a Seoul train station watch a live broadcast of the inter-Korean summit on April 27.   © Reuters

"Constructive make-believe." It is hard to beat or quibble with economist Yanmei Xie's pithy take on the gush-fest over Friday's summit between North and South Korea.

Yes, history was in the air at the truce village of Panmunjom. What kind of history is impossible to say. Might a Nobel Peace Prize be next? Or, as Xie of Gavekal Dragonomics suspects, are we seeing another stitch in a Pyongyang pattern: play nice, win economic concessions and return to Kim Dynasty business as usual?

South Korean President Moon Jae-in clearly thinks engaging with North Korean leader Kim Jong Un is worth the risk. Yet as geopolitical pundits debate whether Moon is a genius or a dupe, the real risk he may be taking is with the economy.

When he took over from an impeached Park Guen-hye in May 2017, Moon's mandate was clear: create jobs, boost competitiveness, and rein in the family-run conglomerates, or chaebol, that are blamed for widening inequality. Yet 12 months on, Moon has been glacial about raising South Korea's game, focusing instead on Kim outreach.

U.S. President Donald Trump has not helped. He forced Moon to renegotiate a free trade deal that had already been in effect for five years. Trump's bluster and "fire and fury" threats aimed at Kim squandered time that would have been better spent by Moon strategizing retooling efforts. But with Kim dangling shiny objects -- vague talk of peace and disarmament -- Moon's economic objectives are sure to get even less oxygen.

That would be a grave mistake. Asia's fourth-biggest economy already lost four years it will never get back under Park. She arrived in 2013 with audacious plans to "democratize the economy." In the 1960s and 1970s, Park's father, dictator Park Chung-hee, promoted the family-controlled giants -- Samsung, Hyundai, LG and Lotte -- that dominate Korea Inc. Over time, their monopolistic oligarchical ways left Korea too top-heavy, too prone to overborrowing and too skewed toward exports. Their dominance stymied the development of innovative small-to-midsize enterprises that create wealth and boost wages.

Instead of disrupting the status quo, Seoul's first female president got co-opted. The same bribery scandal that landed Samsung head Lee Jae-yong in jail for 12 months has Park serving a 24-year sentence. Early on, Park sensed the magnitude of disentangling entrenched tycoons from an economy built around them. Park left the chaebols to their own devices, squandering four years.

Might Moon repeat the mistake? Peace on the Korean Peninsula is indeed worth pursuing, and kudos to Moon for wooing Kim to talks. Though Trump is keen to take credit, any Nobel should go to the man taking the vast share of the risks, including inviting the Kim clan to the Pyeongchang Olympics in February in the face of strong public anger.

This latest detente could easily blow up Moon's legacy. The world, after all, has in many ways been here before. In 2000 and 2007, the young Kim's father, Kim Jong Il, signed grand peace documents with Moon's predecessors. In 2012, Kim Jong Un's government suspended missile tests -- for a few weeks, at least. There is every reason to think this pattern will continue whether or not Trump meets with Kim.

Definitions matter. Pyongyang's interpretation of declaring an end to the Korea War may not be that recognized by international law. To Trump, "denuclearization" appears to mean Kim destroys his nukes. To Kim, it seems to refer to U.S. troops and weapons vacating the Korean Peninsula. There are too many non-starters to count.

At the same time, we only need to consider Muammar Gaddafi's experience after scrapping Libya's nuclear program to understand why Kim will not do so. Any nation that lumps three foes together as the "Axis of Evil" and attacks one - Iraq -- should expect the others to go nuclear in a hurry. Pundits ask how Trump can trust Kim. But why would Kim trust Trump, who probably will renege on an Iran deal that would likely be the model for any accord with North Korea?

Kim family expert Bradley K. Martin has another reason for skepticism. "Much as I would like to be optimistic, I cannot help remembering that governments undergoing major policy transformations generally change key players," says Martin, author most recently of "Nuclear Blues," a novel set in Pyongyang. "Titular head of state Kim Yong Nam accompanied Kim Jong Un to Panmunjom and had led the delegation to the Olympics. He is pretty much the author of the peace offensive tactic to persuade the Americans to abandon their South Korean allies."

Martin has met Kim Yong Nam, first in 1979. He "has been at it for four decades at least," Martin explains. "Has he had a change of heart? At 90? I am afraid I doubt it. Is there anyone in the young marshal's retinue who has had a change of heart?" Stanford University's Daniel Sneider cautions that Friday's summit could be a prelude to conflict. If talks break down, Trump's hawkish National Security Advisor John Bolton may get his way. "This is how the declaration of peace in Korea could lead, relentlessly, to war," Sneider warns.

Moon is right to talk with Kim. But the haste with which it is occurring works in Kim's favor, seducing Moon to risk conceding too much too soon for South Korea's 50 million people. Kim's outreach, meantime, smacks more of political theater to flatter Trump, Vladimir Putin-style, and buy time rather than lasting peace. With a few smiles and sober statements, Kim has Trump calling him an "honorable man," of all things.

"For the moment, joint efforts by North and South Korea and China are succeeding in keeping Trump off the warpath and at the negotiating table," says Xie of Gavekal Dragonomics. "Beneath the surface, though, not much has changed."

Should disappointment arrive, Moon will be left with the fallout from an irate Trump White House. South Korea also will still be left with an uncompetitive economy. Before he knows it, Moon's five-year term might be winding down with few memorable reform wins.

During these next two, three or four years, China will be busily implementing its vision to lead in high-tech manufacturing and beat Silicon Valley at its own game. If during that time, Moon has not ignited a startup boom, lowered an 11% youth unemployment rate, slashed record household debt and made South Korea more appealing to the General Motors's of the world, Moon's legacy may be the onset of a lost economic decade.

Multitasking is hard for any leader. And who knows, the Kim Dynasty might be ready to disarm. Perhaps even ready to greenlight a Trump Tower Pyongyang project. The odds, though, do not favor it. If in fact Pyongyang, Seoul and Washington come to loggerheads again, Moon should be working to salvage South Korea's soft power. What more constructive way than reviving an unruly economy?

William Pesek is a Tokyo-based journalist and author of "Japanization: What the World Can Learn from Japan's Lost Decades." He has written for Bloomberg and Barron's.

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