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.

Norway-Asia Business Review - - Contents - SOFIE LISBY

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.

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