Outlook for 2011-15

• The president, Lee Myung-bak, will remain in office until the next presidential election, due in late 2012. His Grand National Party (GNP) will retain its majority in parliament until the next legislative election, due in April 2012.
• The People's Participation Party (PPP), a grouping that recently broke away from the opposition Democratic Party (DP), could split the parties' vote base to the benefit of the GNP, but the PPP is too small to have a tangible impact.
• The low-level military talks that took place between South and North Korea in February ended early after the Northern representatives stormed out. Further talks are likely but inter-Korean relations will remain tense.
• On March 10th the Bank of Korea (South Korea's central bank) raised its main policy interest rate, the official cash rate, by 25 basis points, to 3%, owing to rising inflationary pressures. Policy rates will be gradually raised in 2011-15.
• The Economist Intelligence Unit expects real GDP growth to average 4.1% in 2011-15. The relatively subdued rate of growth will largely reflect the after-effects of the 2008-09 global financial crisis.
• Year-on-year consumer price inflation averaged 4.3% during January and February, compared with 3.5% in December. As a result of rising price pressures, we have raised our 2011 inflation forecast to 4.2% (previously 3.6%).

Monthly review

• On February 18th the GNP and DP finally agreed to open an extraordinary session of the National Assembly (parliament), after a two-month impasse. Several bills were passed and five special committees were established.
• In February Lee Myung-bak lost one of his closest political allies, when Chang Soo-man resigned as head of a government weapons-purchasing body, the Defence Acquisition Program Administration.
• Hopes of a thaw in inter-Korean relations have proved short-lived. On the second day of talks, in early February, the two sides met for only one hour before lunch and just 12 minutes after, before the North ceased negotiations.
• Policymakers are taking on an interventionist approach to price stabilisation, with pressures being applied on purveyors of food, oil and telecommunications services against price increases.
• South Korea's free-trade agreement with the EU, which was finalised in October 2010, was cleared by the EU Parliament in February. It will go into force in July 2011.
• Manufacturing output increased by 4.6% month on month in January, the biggest month-on-month gain since March 2009.

The outlook for the president, Lee Myung-bak, and his ruling Grand National Party (GNP) remains mixed. Lee Myung-bak can take a certain amount of credit for South Korea's ongoing economic recovery. However, another downturn in the domestic economy would result in higher unemployment and would undermine his popularity. Some voters have also blamed Lee Myung-bak's hawkish stance towards North Korea for causing the sharply higher bilateral tensions evident since 2010. His five-year term as president ends in February 2013, and the next full election for the National Assembly (parliament) is due in April 2012. The GNP holds 171 seats out of 299 in the legislature. Although in theory this majority should provide the president with the means to pass legislation, in practice divisions within the GNP mean that he cannot take his party's full support for granted. Lee Myung-bak's challenge is to avoid becoming a lame duck as attention increasingly shifts to the race to succeed him.

The biggest potential impediment to policymaking will be the factional nature of the main political parties in South Korea. Factionalism within the GNP is set to persist, as Lee Myung-bak's main rival in the party, Park Geun-hye, opposes the government's policies on several fronts. This could destabilise the political scene, as Park Geun-hye might decide to form a new party based on the faction of around 60 GNP and other lawmakers that she controls in parliament, thereby depriving the ruling party of its majority in the National Assembly. Although such an outcome is not the Economist Intelligence Unit's central forecast, bad blood will linger. Park Geun-hye is unlikely to be appeased unless Lee Myung-bak endorses her as the GNP's next presidential candidate (South Korean presidents are allowed to serve only one five-year term). But it is more likely that Lee Myung-bak will seek to thwart her efforts to win the nomination. The issue is likely to come to the fore in 2011. Park Geun-hye is already paving the way for her bid to become the GNP's presidential nominee: in December she launched a think-tank, the National Future Institute, made up of experts in a variety of fields. Although the rivalry between Lee Myung-bak and Park Geun-hye will mean that divisions within the GNP persist, it is unlikely to cause the party to split, as all concerned realise that a divided conservative camp could hand electoral victory to the main opposition centre-left Democratic Party (DP).

South Korea's political scene is more stable than it sometimes appears. Despite a tradition of political brinkmanship, the basic democratic order is stable and commands universal support. In a culture in which steadfastness is a virtue and compromise is viewed as signifying weakness, further political confrontation is likely. This makes for a weak parliament, but it is not fatal to democracy. Many civic groups increasingly practise politics on the Internet, but tensions can still spill out into the streets. Confrontational public protests are led primarily by a small but vocal section of the population, including trade unions, whose fierceness is legendary but whose real influence will continue to decline.

Lee Myung-bak looks set to serve his full term and step down in February 2013, two months after his successor is elected. Unless the timing of the presidential and parliamentary elections is altered so that they become synchronised, Lee Myung-bak's final ten months in power will require him to work with the new National Assembly that is to be elected in April 2012. The build-up to the two national elections-and especially the presidential poll-will dominate South Korean politics in 2011-12. The GNP's parliamentary majority will remain safe until 2012, provided that the party holds together. If Lee Myung-bak manages to attract greater voter support, the GNP may be able to keep control of parliament at the election. Even if he remains unpopular, the party could retain its majority if it finds a new presidential candidate who pledges a fresh start.

It is difficult at this stage to predict who will win the next presidential election, or even who will stand. In the next two years both main parties will be riven by fierce competition for their presidential nominations. The GNP contains a greater number of well-known figures, but some, such as Chung Mong-joon, a business tycoon, appear already to have missed their best chance for a successful tilt at the presidency. This description may even apply to Park Geun-hye-whom Lee Myung-bak defeated for the GNP's nomination in 2007-despite her current prominence (opinion polls suggest that public support for her stands at between 30-40%, whereas her rivals in both the GNP and DP all have levels of support only in single digits). Both Chung Mong-joon and Park Geun-hye are old-style politicians compared with a third potential contender, Oh Se-hoon, the mayor of the capital, Seoul; the latter, however, claims not to be interested in standing.

The DP, meanwhile, remains fractious and lacks charismatic leaders. The centre-left's beaten presidential candidate in 2007, Chung Dong-young, may try again, but if he does he will face competition from the DP's new and more moderate leader, Sohn Hak-kyu. The DP is divided between those who hail from its core support base in Jeolla province in the south-west and supporters of the late Roh Moo-hyun (South Korea's president from 2003 to 2008, who committed suicide in 2009). Rhyu Si-min, who was a health and welfare minister under Roh Moo-hyun, is a leading light in the People's Participation Party (PPP), a small breakaway group that was formed in January and is made up of supporters of the previous president. It is likely that Rhyu Si-min has taken this action with a view to running for the presidency in 2012. None of this bodes well for the DP and PPP as the two parties may now split the votes of their traditional supporters. The first test will come during by-elections that are scheduled for April 27th. It is also possible that South Korea's next leader may be a figure who has not yet built a public profile.

South Korea's foreign relations will continue to focus on North Korea and the four powers that are intimately involved with the peninsula, namely the US, China, Japan and Russia (these countries are the participants, together with the two Koreas, in the six-party talks aimed at reining in the North's nuclear programme). Inter-Korean relations have deteriorated sharply since November, when North Korean artillery batteries shelled Yeonpyeong, a Southern-held island that lies close to the North Korean mainland. This act of aggression ended the slight thaw that had occurred following a previous spike in tensions in the months after the sinking in March of a South Korean naval vessel, the Cheonan. As they did after the earlier incident, the US and Japan are again strongly supporting South Korea; the US responded to the shelling by sending an aircraft-carrier group to the area. China has been more equivocal, suggesting that the six-sided talks should resume and declining to condemn the North's action. In January the North made several calls for the reopening of dialogue between the two Koreas, but there were no breakthroughs during military talks that were held in early February.

South Korea will seek to maintain warm relations with the US. Both countries recognise the importance of their strategic partnership in the political and economic arenas. The rise in tensions between the two Koreas in 2010 has bolstered the relationship between the US and the South. The increasingly belligerent signals that have been coming from the North make an early further reduction in US troop numbers in South Korea unlikely and have already prompted the postponement of the planned transfer to South Korea of wartime operational command of joint forces, originally planned to take place by 2012. Relations with China will be cooler in the early part of the forecast period, following that country's failure to condemn either the sinking of the Cheonan (for which the North has denied responsibility) or the Yeonpyeong shelling (which the North admits but claims to have been a response to firing by the South). However, as China is South Korea's largest trade partner by far, there is limited scope for overt antagonism between the two countries.

Inter-Korean talks make little headway

North Korea has in the past used aggressive tactics to try to force back to the negotiating table the countries involved in the six-party talks aimed at containing the North's nuclear programme (the countries involved are the two Koreas, the US, Japan, China and Russia). But the other participants in the talks, with the exception of China, have grown increasingly reluctant even to begin negotiations-let alone to provide the kinds of economic incentives that North Korea wishes to receive-until the North provides evidence that it is genuinely committed to full disclosure of the progress that it has made on its nuclear programme. Such a commitment looks increasingly unlikely to be given.

Nevertheless, the South has responded positively to several efforts made by North Korea in January to bring about the resumption of inter-Korean dialogue. On January 5th North Korea stated: "We are ready to meet anyone, anytime and anywhere." Later in the month the North's defence minister, Kim Yong-chun, proposed that he and his Southern counterpart, Kim Kwan-jin, hold military talks to discuss ways in which the two sides could reduce tensions. Initial working-level military talks took place on February 8th. After less than two days of meetings, North Korea left the discussions because of differences: the sticking points included disagreements about the date for higher level talks to follow. Further talks are likely in 2011 and may ease tensions marginally, but no significant breakthroughs are expected and bilateral relations will remain volatile. Indeed, at an event that took place after the breakdown in talks South Korea's prime minister, Kim Hwang-sik, said that "there is a possibility for more armed provocations by the North, so we must be perfectly prepared".

On balance, given the poor health of the North Korean leader, Kim Jong-il, and the uncertainties surrounding that country's delicate succession process-Kim Jong-il has anointed his third son, Kim Jong-eun, as his successor but it is still unknown how acceptable he is to the Northern political establishment-the North looks set to continue to pose a threat to peace and stability on the Korean peninsula in 2011-15.

The government will pursue business-friendly policies in 2011-15. However, there are concerns that Lee Myung-bak may continue to face obstruction in parliament when attempting to pass legislation. The South Korean economy is heavily dependent on external trade, and the authorities will therefore also implement policies (including modest capital controls) that aim to prevent the country's currency, the won, from strengthening too sharply in the international foreign-exchange market. Now that the domestic economy appears to have stabilised, the authorities are gradually shifting their attention to structural issues. The government will nevertheless exercise caution in terms of moves to reverse its stimulus measures. In the forecast period the authorities will seek new sources of economic growth in an effort to fend off the competitive threat from China. As part of this push, the government will pursue policies aimed at attracting foreign direct investment. It will also continue to seek to finalise or negotiate free-trade agreements with South Korea's largest trading partners.

Most of the tax cuts for individuals and tax concessions for firms that were implemented in late 2008 and 2009, and also the range of incentives to help boost economic activity that were introduced during that time, remain in place. Moreover, public expenditure remained relatively high in 2010 as a number of major projects reached implementation stage. Nevertheless, a strong cyclical recovery in 2010 helped to boost revenues and reduced the need for non-capital fiscal stimulus measures (such as subsidies given to employers in an effort to encourage them to retain staff). As a result of this recovery, the budget moved from a deficit of 1.7% of GDP in 2009 to an estimated surplus of 1.2% in 2010. We expect the government to pursue a generally prudent fiscal policy direction in 2011-15, as it remains mindful of the looming pressures on the public purse arising from the rapid ageing of the population, as well as of the uncertain costs involved if the country has to absorb North Korea in the future. The budget will remain in surplus throughout the forecast period as revenue expands at a healthy pace and expenditure growth is contained. The public debt stock will remain low by OECD standards. We forecast that the public debt to GDP ratio will fall from 23.1% of GDP in 2011 to 21.9% in 2015.

At its monetary policy meeting on March 10th the Bank of Korea (BOK, South Korea's central bank) raised its main policy interest rate, the official cash rate (OCR), by 25 basis points, to 3%. The most recent previous increase in the OCR had occurred in January. Similar to that increase, the latest rate rise was driven by the BOK's desire to prevent a sustained pick up in inflation-in January and February inflation rose by 4.1% and 4.5% year on year respectively, above the BOK's 2-4% target range-amid signs of strengthening domestic demand and tighter product markets. Inflationary pressures are expected to dissipate by the middle of 2011, and annual average consumer price inflation is forecast to be only slightly above the central bank's target range this year. The BOK is therefore still likely to maintain an accommodative monetary stance. We expect it to keep interest rates on hold until it sees the impact of its latest rate rise later this year. The central bank will increase rates slowly during the next few years. Monetary policymaking will remain complicated by the fact that domestic rate rises act to strengthen the won in the international foreign-exchange market, something that the BOK is keen to avoid as the economy relies heavily on external demand for growth.

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Real GDP growth in 2010 reached 6.1%, boosted by an acceleration in private consumption growth, strong investment and a pick-up in demand for South Korean exports. The country's vigorous economic recovery will continue to be supported by improved business and consumer confidence. Respectable growth rates in the US and euro zone economies, as well as emerging markets, will help the world economy (at market exchange rates) to grow by 3.1% in 2011. These two developed economies remain key sources of demand for South Korea's exports, even though the country's exporters are becoming increasingly reliant on demand in emerging markets. Given that growth in exports of goods and services is outstripping that of imports in 2011, the contribution to GDP growth from the foreign balance will be positive this year. On balance, overall real GDP growth in 2011 will average 4.6% and will continue to be driven by recovering consumption and investment.

Annual GDP growth will average 4% in 2012-15-a respectable pace, but below the trend rate of growth of around 5% a year in the period following the 1997-98 Asian financial crisis, and also considerably slower than the blistering pace of expansion recorded in the years immediately preceding the 2008-09 global financial crisis. The relatively subdued rate of economic growth from 2012 will largely reflect the after-effects of the global crisis and the wealth destruction that occurred in 2008-09. This will prevent a strong recovery in domestic demand in other OECD markets; the relatively robust outlook for the US economy in 2011 is partly statistical and partly driven by the expected temporary effects of further fiscal stimulus measures in that country. The poor outlook in OECD economies will in turn cloud South Korea's export prospects during the forecast period. Indeed, another deterioration in the global economy would undermine the country's export-dependent economy.

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The headline rate of inflation will remain under upward pressure during much of 2011 owing to a continued recovery in domestic demand and a sharp rise in global oil and food prices. Indeed, the year-on-year import inflation rate remained in double-digits in both December and January, while consumer price inflation averaged 4.3% year on year in January and February. As a result of this increase in price pressures, we have revised up our forecast rate of inflation for this year to 4.2%, from 3.6% previously. We expect inflation to remain under control in 2012-15, for three main reasons. First, the domestic and global economic recovery has reduced excess capacity in product markets, and South Korean manufacturers will thus continue to find it difficult to raise prices, owing to competition from other economies that make similar products for export. Second, the won is expected to strengthen against the US dollar in the forecast period relative to its value in the first half of 2009, helping to limit imported inflation. Third, global oil and non-oil prices are expected to fall from their current highs in the remainder of the period. We forecast that consumer price inflation will average 3.1% a year in 2012-15. Given the uncertainty that persists regarding the global economic outlook and thus also the prospects for South Korea's economy, real wages are expected to rise only slowly in 2011-15. However, risks to our inflation forecast remain on the upside: one particular concern is that political problems in Middle Eastern oil-exporting countries could yet result in a further increase in global oil prices.

The won has attracted speculative foreign capital since April 2009, much of it funded by the US dollar carry trade (whereby investors borrow in low-yielding currencies, such as the US dollar, and invest in countries where interest rates are higher). This helped to push up the value of the won against the dollar until early 2010, when the onset of the debt crisis in Europe led banks to deleverage, putting downward pressure on the won. The impact of the fluctuating value of the local currency as a result of changes in sentiment has raised serious concerns about the possible impact of won volatility on South Korea's economic recovery. To help prevent further damaging fluctuations in the won's value, in late 2010 the government reimposed taxes on interest and capital gains on South Korean government bonds owned by non-residents. (Taxes on interest and capital gains had been waived since May 2009.) This measure, along with others implemented since mid-2010, is designed to control potentially destabilising capital flows. We expect the won to strengthen on an annual average basis from W1,156.2:US$1 in 2010 to W1,065:US$1 in 2015. However, there are significant risks to this forecast. The won will remain vulnerable to changes in investor risk appetite, and also to geopolitical developments. Notably, elevated tensions with North Korea could put downward pressure on the currency in international foreign-exchange markets in 2011-15.

The current-account surplus will fall from an estimated 2.8% of GDP in 2010 to 1% in 2015. The merchandise import bill will expand in 2011-15, mainly owing to strong domestic demand growth and above-trend prices for oil and non-oil commodities. The increase in the total cost of imports will exceed the expected rise in export earnings in the period, so that the surplus on the trade account will fall. However, the trade surplus will remain substantial, at US$30.1bn in 2015. The services account will stay in deficit, largely because expenditure by outbound tourists from South Korea will remain considerably greater than the country's tourism earnings. The income surplus will rise, as outflows of profits on foreign investments in South Korea will be offset by inflows from the substantial stock of assets held abroad by South Korean businesses.

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On February 18th the two main parties, the ruling conservative Grand National Party (GNP) and the centre-left opposition Democratic Party (DP), finally agreed to open an extraordinary session of the National Assembly (parliament) after a two-month impasse. The special session will continue until March 22nd. Lawmakers made up for lost time, passing 37 pending bills and electing a new chair of the parliamentary committee for culture, sports and tourism, as well as a new member of the Human Rights Commission. They also established five special committees, each of which cover a different topic including inter-Korean relations, political reform and domestic social issues. These bodies will sit until August 17th.

Not all has gone well for the government, however. Corruption scandals are a dismal, hardy perennial in South Korea. On February 16th-the birthday of North Korea's leader, Kim Jong-il, and thus a public holiday in the North-South Korea's president, Lee Myung-bak of the GNP, lost one of his closest political allies when Chang Soo-man resigned as head of a government weapons-purchasing body, the Defence Acquisition Program Administration. A former vice defence minister and career official, Chang Soo-man was not only a main figure in the current round of modernising military procurement systems, but had earlier been the brains behind some of Lee Myung-bak's major pledges during his 2008 presidential election campaign, including his 747 slogan: to attain 7% annual real GDP growth, to reach per capita income of US$40,000 and to become the world's seventh-largest economy. (Although these aims were much derided during Lee Myung-bak's election campaign, in 2010 South Korea became the world's seventh-largest exporter of goods and posted real GDP growth of more than 6%.)

Chang Soo-man's sudden resignation appears to involve two separate scandals. The immediate of these is known as "Hamba-gate", after the Korean word for workers' canteens on construction sites. These canteens are lucrative; a businessman and broker, Yu Sang-bong, is accused of widespread bribery to obtain such franchises. This scandal has already engulfed a former national chief of police, Kang Hee-rak, who was arrested on January 27th on suspicion of accepting some US$170,000 in bribes from Yu Sang-bong. Others who were summonsed include a former head of the coastguard, Lee Gil-bum. Also under suspicion is a former presidential aide, Bae Geon-ki, whose remit was to investigate corruption among staff in the Blue House (the official residence of South Korea's president) and their relatives. (Bae Geon-ki resigned on January 10th.)

Separately, on February 18th Chang Soo-man was questioned by prosecutors about whether he had received gift certificates from Daewoo Engineering and Construction, a division of a chaebol (a South Korean conglomerate), Daewoo. In 2010 the Daewoo division won a US$43m contract to relocate the Special Warfare Command, the body responsible for South Korea's special forces, and an airborne unit. Chang Soo-man was deputy defence minister at the time.

South Korea today is predominantly urban, and rural concerns therefore rarely impact on domestic politics. However, South Korean farmers are now suffering a two-sided problem. Unusually heavy and late snow is ruining winter crops, while livestock have been devastated by two separate outbreaks of disease, neither of which seems yet to have run its course. Foot and mouth disease broke out in November 2010, while an outbreak of the virulent H5N1 strain of avian influenza (bird flu) followed in December. The latter has so far seen 5.5m poultry and ducks culled, while the toll from foot and mouth disease has reached around 3.5m animals (including cows, goats, pigs and deer). Pigs have been bulldozed into hastily dug trenches and buried alive because the time and/or drugs to slaughter them more humanely have been lacking. Questions are being asked about not only the authorities' competence and preparedness to deal with this dilemma, but also the prevalence of factory farming methods, considered cruel at the best of times, that are widely blamed for causing such outbreaks and for making them harder to contain. Meanwhile, the effects of the outbreaks are already being felt in the form of shortages of some foods and rising consumer price inflation. Agricultural exports, which in 2010 stood at around US$6bn, may fall as low as US$3bn in 2011, according to some estimates-the risk that local animals may be contaminated by foot and mouth disease is a particular worry for South Korean meat exporters.

The possibility of a thaw in relations between South and North Korea has proved to be short-lived, at least for now. The first official dialogue since the North shelled the South Korean island of Yeonpyeong on November 23rd, killing four, began on February 8th at the truce village of Panmunjom in the Demilitarised Zone (DMZ, a buffer that separates the two Koreas). This meeting-between two colonels, who know each other quite well on a personal level-was meant to be preparation for higher-level military talks. It began well: a nine-hour session on the first day suggested a real effort to resolve problems. But on the second day the two sides met for only one hour before lunch and just 12 minutes thereafter before the North stormed out. A stream of vitriolic denunciations from North Korean media followed.

It was always going to be difficult to find an agreed formula to discuss the shelling and the sinking of a South Korean naval vessel, the Cheonan, in March 2010 (for which the North continues to deny responsibility). Among a plethora of offers of dialogue-purportedly without strings-in the North's latest peace offensive, the South had agreed to military talks as potentially offering a way forward. The sticking points, it appears, included the niceties of language in stating this delicate agenda in a manner that was acceptable to both sides, as well as disagreements about the date and appropriate rank for the planned higher-level talks to follow. Despite the ferocity of the North's subsequent reaction, this may not be the last word. Nevertheless, hopes of renewed Red Cross talks, leading to further family reunions, have also been dashed for the moment.

The breakdown in talks leaves South Korea more vigilant than ever as to what the North might do next. On February 18th a large and rare, if not unprecedented, 220-strong joint meeting of South Korean central and local government representatives plus the military took place, with the aim of reviewing the country's readiness against any fresh hostilities. The prime minister, Kim Hwang-sik, told the assembled Lee Myung-bak, cabinet, mayors and governors, as well as military and police top brass that "there is a possibility for more armed provocations by the North, so we must be perfectly prepared." On the previous day the head of the US Pacific Command, Admiral Robert Willard, stated at a forum in the US that "we may very well be facing the next provocation in months and not years" from North Korea.

Another contentious issue is a GNP bill that has been stalled since passing the committee stage a year ago. The bill is aimed at setting up a public body dealing with North Korea's human rights issues and giving financial aid to non-governmental organisations that are involved in such issues. The DP fears that this will simply antagonise the North. Southern opinion is divided, but public opinion polls suggest that the Yeonpyeong shelling has, unsurprisingly, boosted support for a hard line on the North and weakened those who advocate handling the situation more delicately.

Supporting the labour market was the South Korean government's main economic preoccupation in 2010, but in 2011 containing inflationary pressures is taking its place as the country's top economic policy priority. Consumer prices rose by 4.1% year on year in January and by 4.5% in February. On a month-on-month basis price inflation averaged 0.9% in the two-month period, compared with a 0.6% rise in December. In addition to rising global food pressures, there are problems with domestic food supplies stemming from the outbreaks of foot and mouth disease and bird flu. Domestic fuel prices climbed by 13.1% year on year in February. Core inflation, which excludes oil and food, was up by 3.1% in the same month, the highest rate since August 2009. All this suggests that inflationary pressures are building and that the odds of the government achieving its stated goal of limiting annual average inflation in 2011 at around 3% are falling. Import prices, a leading indicator of consumer price inflation, surged by 14.1% year on year in January, following a 12.7% jump in December 2010, according to the Bank of Korea (BOK, South Korea's central bank). Import inflation is coming under upward pressure largely owing to higher global oil and food supplies.

Against the backdrop of rising inflation, policymakers are taking on a highly interventionist approach to price stabilisation, with overt pressures applied on purveyors of food, oil and telecommunications services against price increases. Public utilities have had to forego price increases for electricity and city gas. The state-controlled utility companies have long been operating under the government's heavy hand. For many years, it has been a norm for the authorities to set electricity and natural-gas prices below cost, denying profits to state-owned Korea Electric Power and Korea Gas. The government is defending its anti-inflation bullying tactics as smoothing operations, denying undue infringement of market principles. Food companies, oil refiners and telecoms carriers have also been targeted by the government. The country's largest dairy producer, Seoul Dairy, had to cancel plans to increase milk prices within hours of its announcement in February after executives were called in by government officials.

Korea Agro-Fisheries Trade Corporation, a firm that works between the private sector and the Ministry for Food, Agriculture, Forestry and Fisheries to smooth out price fluctuations of primary goods and to promote exports, is working to set up an international grain-trading company in the US as early as May. This company will aim to counter the dominance of multinational grain traders, such as US-based Cargill, and to provide a cushion against grain-price volatility by buying directly from grain farmers instead of via major traders of such goods. South Korea, which is one of the biggest grain importers worldwide, depends almost entirely on a few major grain-producing countries to meet its grain import demand. Following Lee Myung-bak's open complaint about petrol prices "mysteriously" defying gravity, domestic oil refiners are facing regulators' scrutiny into how they mark up their petroleum products. The Ministry of Knowledge Economy has launched a task force that is investigating the pricing of oil products and will prescribe "remedial measures" in the nearby future, with the aim of bringing more competition into the market and streamlining distribution channels. The Korea Communications Commission, which oversees South Korea's telecoms industry, has set up its own task force with the specific aim of cracking down on purported price rigging by telecoms carriers.

The BOK has kept its main policy interest rate, the official cash rate (OCR), at 2.75% at its monetary policy meeting in February, citing uncertainty about the global economic outlook. This measure followed a 25-basis-point rise at the central bank's meeting in January. However, the build up of inflationary pressures in the first two months of 2011-the year-on-year increases were both above the 4% upper threshold for consumer prices that the BOK has set for 2010-12-prompted the central bank to raise the OCR to 3% at its meeting in March. The BOK cited several reasons for the increase, including the robust economic outlook for emerging markets and domestic demand, a tightening domestic labour market, rising global commodity prices and the need to contain inflationary expectations.

South Korea's successful push for global trade liberalisation deals is boosting the momentum behind its talks on free-trade agreements (FTA) with China and Japan. South Korea's FTA with the EU, which was finalised in October 2010, was approved by the EU Parliament in February; it will come into force in July. The prospects for South Korea's FTA with the US being ratified in both countries are better than ever, with a supplemental agreement on bilateral car trade-a major sticking point against ratification since the FTA was signed in June 2007-being formally signed in February 2011.

Given the provisional success of its FTA with the US, South Korea is now coaxing China and Japan into forging similar deals. The case for bilateral agreements with China and Japan and even a trilateral FTA among all three is strengthening in light of the former's relentless economic rise and the latter's growing desire to sign trade agreements. South Korea's Ministry of Strategy and Finance stated in February that talks on regional economic integration would make headway this year, seeing a common market among the three East Asian economies as only a matter of timing, given the compelling benefits of removing tariff barriers for the three economies. Intra-regional trade in East Asia has plenty of room for growth. According to the strategy and finance ministry's data, trade between the three countries was the equivalent of 22% of their combined worldwide trade in 2008, far lower than 63.9% within the EU and 39.9% between the countries that signed the North American Free Trade Agreement (NAFTA).

According to the South Korean data information service, Statistics Korea, in January manufacturing output increased by 13.7% year on year, and by 4.6% month on month, the biggest monthly gain since March 2009. The manufacturing operation ratio averaged 84.8 in January, compared with 82.1 in the previous month, and it was the highest ratio on record. Automotive output climbed by 16.8% month on month and 28% year on year in January as export demand continued to grow amid the ongoing recovery in the global car market. The solid year-on-year growth rates are all the more remarkable as manufacturing growth was so strong in January 2010.

Meanwhile, the job market retained the same positive tone that prevailed throughout 2010, with 331,000 jobs being added to the economy over the 12 months to January. Manufacturing continued to lead job growth, with 224,000 manufacturing jobs being added. Manufacturing job growth (when compared with year-earlier levels) has now topped 200,000 for seven consecutive months. The non-seasonally adjusted unemployment rate nevertheless rose to 3.8% in January from 3.5% in December, although it was lower than the 5% that was recorded in January 2010. With support from the steady job market recovery, consumer spending grew at a healthy pace throughout 2010. Statistics Korea's data indicate that retail sales increased by 4.3% year on year in December, and by 6.7% for 2010 as a whole, compared with a 2.6% rise in 2009. Department store sales, a major barometer of consumer sentiment, surged by 10.2% in December and by 9.7% for 2010 as a whole, nearly three times the 3.3% increase in 2009.

In January South Korean merchandise exporters sold US$44.9bn worth of goods (customs basis) overseas, a surge of 46% from the year-earlier period, according to the Korea Customs Service. Notably, exports in January came in higher than the number for December, defying typical seasonality-exports usually drop in January after heady year-end shipments in the previous month. In year-on-year terms in January shipbuilding exports jumped by 275.1%, car exports by 48.2% and steel exports by 46.3%. Exports to the US and the EU soared by 36.1% and 84.5% respectively, outpacing a 15.8% rise in sales to China, South Korea's biggest export market. Meanwhile, merchandise imports rose by 32.9% in January from the year before, accelerating from a 21.7% increase in the previous month.

The BOK reported a current-account surplus of US$2.1bn for December, and US$28.2bn for 2010 as a whole. The full-year surplus shrank from the US$32.8bn that was registered in 2009, when imports began recovering from the 2008-09 global financial crisis. Nevertheless, the merchandise trade surplus expanded to US$41.9bn in 2010 from US$37.9bn in 2009, owing to powerful export growth in 2010. Meanwhile, the service trade deficit widened to US$11.2bn in 2010 from US$6.6bn in 2009.

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Please see graphic below

Land area

99,678 sq km

Population

48.2m (2010; National Statistical Office)

Main towns

Population in '000 (2010)

Seoul (capital): 9,895

Busan: 3,663

Daegu: 2,481

Incheon: 2,475

Daejeon: 1,368

Gwangju: 1,414

Climate

Continental, with extremes of temperature

Weather in Seoul (altitude 87 metres)

Hottest month, August, 26.5°C; coldest month, January, minus 0.4°C; driest month, January, 10.8 mm average rainfall; wettest month, July, 274.1 mm average rainfall

Language

Korean

Measures

Metric system. Some local measures are:

1 pyong = 3.3058 sq metre

1 chungbo = 0.992 ha

1 suk = 100 dai = 180.39 litres

1 kwan = 1,000 don = 3.75 kg

Currency

Won (W). Average exchange rates in 2010: W1,156:US$1; W1,314:¥100

Time

9 hours ahead of GMT

Public holidays

January 1st (New Year's Day); February 2nd-4th (Lunar New Year); March 1st (Independence Movement Day); May 1st (May Day); May 5th (Children's Day); May 10th (Buddha's Birthday); June 6th (Memorial Day); August 15th (Liberation Day); September 11th-13th (Chuseok holidays); October 3rd (National Foundation Day); December 25th (Christmas Day)

Official name

Republic of Korea

Form of state

Presidential system; the president and the National Assembly (the legislature) are directly elected; National Assembly members are elected using a mixed system of first past the post and proportional representation

The executive

The president (elected for a single term of five years) appoints the State Council (cabinet), comprising the president, the prime minister and 15-30 ministers. Cabinet ministers are not normally members of the National Assembly

Head of state

Elected president

Legislature

Unicameral Kuk Hoe (National Assembly) of no fewer than 200 members, elected for a four-year term. The current assembly, which was elected in April 2008, has 299 seats, 245 of them filled by direct election and 54 distributed among parties in proportion to their shares of the vote. In February 2011 the conservative Grand National Party (GNP) had 171 members of parliament and the centre-left Democratic Party (DP) 85; smaller parties and independents held the remaining seats

National elections

December 2007 (presidential), April 2008 (parliamentary). The next parliamentary election is due in April 2012 and the next presidential poll is due in December 2012

National government

Lee Myung-bak of the GNP, a former mayor of South Korea's capital, Seoul, was elected president in December 2007 and began his five-year term in February 2008. The GNP won control of the National Assembly in the parliamentary election in April 2008. Lee Myung-bak will continue to seek support from other conservative parties to strengthen his control over parliament

Main political organisations

GNP, DP, Liberal Forward Party, Pro-Park Coalition, Democratic Labour Party

Main members of State Council

President: Lee Myung-bak

Prime minister: Kim Hwang-sik

Key ministers

Defence: Kim Kwan-jin

Education, science & technology: Lee Ju-ho

Employment & labour: Bahk Jae-wan

Foreign affairs & trade: Kim Sung-hwan

Health, welfare & family affairs: Chin Soo-hee

Justice: Lee Kwi-nam

Knowledge economy: Choi Joong-kyung

Land, transport & maritime affairs: Chung Jong-hwan

Public administration & security: Maeng Hyung-kyu

Strategy & finance: Yoon Jeung-hyun

Unification: Hyun In-taek

Central bank governor

Kim Choong-soo