Were the recently completed winter Olympics the beginning of a new political era on the Korean peninsula?
As the steam of the 2018 Winter Olympics dissipates, we take a look at what the Games might mean for economic growth and political stability going forward.
There was no end to the celebrations in July 2011 as Seoul won their decade-long bid to host the 2018 Winter Olympics. The initial response was swift and tangible. Shares in casino and resort operations and construction firms soared.
A study by the Hyundai Research Institute had found that hosting the 2018 Games would inject WON 65 trillion (USD 60.7 billion) into the South Korean economy through investment, spending, and spin-off consumption, including WON21 trillion from direct benefits such as investment in social overhead capital and a boom in the tourism industry, as well as WON 43 trillion from indirect ones over the next ten years. Some of the country’s largest conglomerates such as Korean Air Lines and Samsung had been fervent supporters of the bid. The promise of the Olympics
The initial response was swift and tangible. Shares in casino and resort operations and construction firms soared, with Reuters reporting double digit spikes in the shares of several companies. The shares of Seunghwa Premium Construction Co surged to its daily limit of 15 percent on expectations that the builder would win the contract to build a highway from the capital Seoul to PyeongChang. Hyuandai Cement also rose 15 percent on the day the announcement was made, and casino operator Kangwon Land rose 9.5 percent on the Seoul stock exchange. The optimism could be felt even into early this year; the Korean stock market index (KOSPI) hit a new high of 2,589.19 in January 2018.
At the time of winning the bid to host the Olympics, many in South Korea saw the 2018 Winter Games as a chance to propel the country into a modern high-tech power and strengthen the national brand, much like the 1988 Seoul Olympics has been stored in the national narrative as a marker of the emergence of South Korea as an Asian powerhouse, and helped propel the success of companies like Samsung and LG.
Then came the costs. According to a report by the Council on Foreign Relations, South Korea spent USD 13 billion on hosting the 2018 Winter Olympics, nearly double the projected USD7 billion budget. Budget runs are the norm rather than the exception in the history of the Olympics, and countries often take on enormous debts to finance the event.
“As the cost of hosting Olympics keeps escalating, it becomes even more difficult for cities to realise positive returns from the events,” Abhineet Kaul, a director for public sector and government practice consulting at Frost & Sullivan was quoted by CNBC. “Most of the host cities have taken on unaffordable debt to fund the infrastructure development, and the financial returns have not justified the investment. This has led to cities cutting public spending to service their debt or the vicious cycle to borrow more to retire old debt.”
The cost of hosting the Olympic Games has deterred countries from applying, and the IOC made the unprecedented decision last year to announce the venues for two summer games at the same time (Paris will host the 2024 Olympics and Los Angeles the 2028 Olympics) after all other candidates pulled out.
Sluggish domestic spending
South Korea has seen sluggish
domestic spending in the past couple of years. However, the preparation leading up to the Games saw the creation of more social overhead capital which was aimed at stimulating consumption and the creating jobs. In fact, at the beginning of the year, the Bank of Korea (BOK) raised its economic growth forecast to 3 percent, from its earlier forecast of 2.9 percent. Chang Min, the BOK’s director general for research bureau told reporters that the PyeongChang Olympics was expected to boost private consumption by 0.1 percentage points during the first quarter of the year.
Tourism is one of the sectors expected to benefit from the Olympics in the short and medium term. The Games were expected to attract 2 million more foreign tourists this year than last year, and help put the mountainous rural province of Gangwon on the map for future travellers.
A large portion of the USD 13 billion investment has gone into infrastructure projects linking the sparsely populated province to Seoul, as well as constructing new hotels and venues, and the investment has, at least in the short term been an economic boon for the region. According to a BOK report last year, economic growth in Gangwon outpaced that of the country in 2015, while job growth edged out the nationwide rate in 2016.
A long-term view
Not everyone shares the optimism. Many are concerned that the economic benefits will become very short-lived without sustained tourism growth. Robert A. Baade, an economics professor at Lake Forest College in Illinois who has studied Olympics economics, told The Wall Street Journal that the various economic impact studies produced by South Korean think tanks “may well significantly exaggerate the economic impact the games will provide. For them to make the argument that if you don’t get the immediate pay-off, the country will experience long-term benefits such as tourism. You’ve got to look at that very carefully.”
There is already indication that optimism about the effects of the Olympics should be kept in check. According to ForwardKeys, a Spain-based global analyser of international air travel, inbound flight bookings rose 15.4 percent year-over-year in February but fell 24.9 percent in March. Pointing to possible reasons for the decline, the company noted the impact of geo-political issues with China and North Korea on the tourism industry in Korea. According to analytics and data firm STR, the hotel industry in Korea has seen decreases in hotel occupancy in recent year, with overall occupancy at 65.3 percent in 2017, compared with 70.4 percent in 2016 and 76.9 percent in 2011.
The beginning of a new era?
There have been positive outcomes as well. One of the more significant developments in the leadup to the Olympics was the surprising announcement that North Korea would send athletes and a delegation South Korea to participate in the Games. The decision was by many seen as a pivot for bilateral relations between the two countries. “The Olympic Games has been a critical juncture that has changed the phase from pressure towards dialogue,” Kim Hyun-wook, a scholar at Korea National Diplomatic Academy told The Globe and Mail.
According to Hyun-wook, the Olympic Games have made “South Korean people feel that the North and South are one national identity.” Indeed, sixty-five percent of those surveyed by the Korea Society Opinion Institute believe the Olympics will improve inter-Korean relations. Furthermore, a RealMeter survey showed that 61.5 per cent of people supported an inter-Korean summit.
Shares in a number of companies in South Korea’s biggest industries, such as electronics and construction, have rallied as a result of improving relations between the South and the North, and in anticipation of a historic meeting between US President Donald Trump and North Korean leader Kim Jung Un. Prior to the summit in April 2018 between South Korean President Moon Jae-In, shares in Hyundai Engineering and Construction shot up about 28 percent to WON 51,700, their highest level in three years.
Marcus Noland, executive vice president and director of studies at the Peterson Institute for International Economics, told the CNBC that the South Korean economy has been relatively immune to concerns about security threats from the North. Now South Korean businesses are bracing themselves for a potential opening of the North Korean economy.
“We expect the construction sector would immediately benefit from an urgent need for power plants and infrastructure in North Korea, if the economy opens,” Sungmee Park, an analyst at Citi told Financial Times. “In the longer term, we also expect opportunities in the housing, commercial buildings and plants for the 25 million population of North Korea.”
Is this the beginning of reunification? It won’t happen anytime soon, say experts. It if were, however, it would come with huge economic promises for both countries; according to the CNBC, in 2015 the Korea Institute for International Economic Policy, a government think-tank, estimated that a unified Korea could generate an USD 8.7 trillion economy by 2055, 1.7 times the projected size of South Korea alone.
Above left: The joint Korean team at the 2018 PyeongChang WinterOlympic Games Opening Ceremony. Above: South Korean soldiers standing guard at the JSA between the blue buildings. View from the south. To the rear, three-story Panmungak hall in North Korea.