beyondbrics

South Korea loves blaming outsiders for its inflation headaches. But this week is a classic example of why eye-watering food and agricultural prices are really a homemade problem.

Seoul is sending very confused signals. It is unclear whether the priority is to fight prices or to protect inefficient producers and suppliers who are keeping prices too high. The central bank held rates at 3.25 per cent for a seventh continuous month on Friday, not knowing which way to run.

On the one hand, inflation is doggedly high. It hit 4.2 per cent in December, unchanged from November and above the target ceiling of 4 per cent. On the other hand, Seoul fears its manufacturers and exporters are expecting a tough 2012. For the world’s number seven exporter, that’s bad news.

Naturally, it’s fair enough for resource-poor South Korea to grumble about external price shocks, particularly from commodities. The cost of imports soared 13.4 per cent last year, compared with 5.3 per cent in 2010. Oil and iron ore prices really hurt.

However, Bahk Jae-wan, the finance minister, concedes there is a deeper problem. He said on Thursday that Korea could beat inflation by improving supply chains and increasing competition. Correct diagnosis. But is Korea treating this malady? Not really.

Food prices are prone to sudden spikes. Prices of staples such as radish and cabbage lurch up three-fold or four-fold for several week periods. Again, South Korea likes to blame an external factor: weather. In fact, the runaway prices are a sign of the moribund agricultural industry. It’s now just elderly and highly protected farmers who scrabble a living from Korea’s farms. By the time a pear has gone through the maddening network of wholesalers, deliverymen and protected cornershops, it will cost you $3!

So how is Korea’s government tackling this? Confusingly, Mr Bahk made his inflation comments at Nambu traditional market, one of his favourite political stamping grounds. Seoul is proudly protecting these traditional markets and corner shops (and the whole inflation-stoking food chain behind them) to preserve jobs rather than let large cheap retailers move in. Korea also said this week it was moving to cull cattle to keep local beef prices artificially high.

The government says trade agreements – finalised last year with the US and EU – are the long-term answer. Slashing tariffs with these major agricultural producers will ultimately make life more affordable for the ordinary Korean consumer, the story goes. Beyond Brics sees little sign of his groceries getting cheaper. Prices are controlled by importing cartels. Supply chains are still way too long.

Also, doing business in South Korea has not suddenly changed. Beyond Brics met a European exporter looking to take advantage of the trade agreement with the EU to sell his (far cheaper) meat to Korean shoppers. The Korean officials advised him that getting a licence would take years. Bringing daily living costs down may take an equally long time unless Korea admits many painful price problems lie not in “external factors” but in internal protectionism.

The answer lies in a sensible debate on welfare. Korea needs to work out how to provide for and retrain those who will ultimately have to lose their jobs in weak farms, supply companies and traditional retailers. Welfare has already become the main issue in this year’s national elections but the debate is currently very superficial. Neither of the two main parties wants to address the core issue of restructuring inefficient small businesses and shops to combat prices.

Until then, pears remain a luxury.

Related reading:
Caution over easing Asian inflation, FT
China inflation: glass half full/empty, beyondbrics
China inflation: battle not over, FT video