Seoul looks at grand projects to spur growth

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When Lee Myung-bak was mayor of Seoul he won plaudits for digging up an inner-city highway and turning an underground stream below into a promenade for residents.

As president of South Korea he is scaling up his infrastructure ambitions, offering a much grander project to build a canal linking Seoul to Pusan, Korea’s main port, that has sparked environmental concerns and questions over its cost and usefulness for a nation almost surrounded by sea.

Whether it gets built or not, analysts believe that Wednesday’s parliamentary victory for Mr Lee’s Grand National party (GNP) will allow him to use state-backed infrastructure investments as a tool to fulfil his pledge to boost South Korea’s annual economic growth rate to 7 per cent. The government is predicting growth of 6 per cent this year, up from 5 per cent in 2007.

Yoon Jong-bin, professor at Myungji University, believes “there is no other realistic option to achieve his growth target” than for Mr Lee to spur massive construction spending. “That is why he is obsessed with the canal project.”

To boost investment and productivity, Mr Lee could also give more leeway to the chaebol, the family-controlled conglomerates that have long dominated the South’s business. As South Korea’s first chief executive president, Mr Lee’s December election was a vote of confidence in his corporate record, particularly at the helm of the construction division of Hyundai in the 1970s.

Already there are indications that, under the guise of a deregulation drive, Mr Lee will unwind some cross-sector investment restrictions introduced during the past decade. The liberal governments who ruled for most of that time sought to level the playing field between chaebol and smaller companies.

One of the government’s aims is greater banking consolidation, including the creation of a national investment bank with international clout comparable to that of Nomura, the Japanese bank. The government is also wetting chaebol appetites by proposing more privatisations, starting with state-owned lenders.

Meanwhile, local tycoons are talking about having greater business reach. This week, Park Sam-koo, chairman of Kumho Asiana, said South Korea’s seventh-biggest conglomerate should add asset management and shipping activities.

Despite worldwide stock market turbulence and a credit squeeze, the GNP’s electoral success comes as South Korea’s economy is seen outperforming neighbours, with inflation also less of a concern than in countries such as China.

Last week the Asian Development Bank forecast that South Korea would be the only country in east Asia to avoid a slowdown this year, with growth of 5 per cent accelerating to 5.2 per cent in 2009. The ADB also predicted a 2008 inflation rate of 3.4 per cent, still below the upper limit of the 3.5 per cent band targeted by Seoul.

Other likely targets for state investment include rail and road networks. Construction activity could rise further if the government decides to ease restrictions on overhauling older residential buildings in Seoul’s wealthiest districts, as well as on adding factories around the capital.

The previous government worked alongside an almost-deadlocked parliament. Furthermore, the diverging lengths of presidential and parliamentary terms mean that Mr Lee is the first president in 20 years to gain a parliamentary majority just after taking office.

Wednesday’s vote confirms support for the government’s emphasis on boosting investment and private spending, including via tax cuts.

But analysts warn that the low turnout for the vote means Mr Lee does not have a blank cheque for controversial projects such as the canal.

“The government should have used this election as an opportunity to ask for public approval for its policies, but it didn’t, which is regrettable,” says Im Hyuk-baek, professor at Korea University.

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