On the 28th of February, the U.S. together with Israel, conducted a series of strikes on
Iran triggering a regional war. Oil and Gas prices jumped as shipping through the strait of
Hormuz declined while the NASDAQ dropped 2.28%. Yet no stock exchange was hit
harder than the Korea Exchange (KRX) with the KOSPI plunging 12%. Identifying the
implicit proximate cause is straightforward: the South Korean (SK) Chaebol-dominated
economy’s reliance on Middle Eastern (ME) crude imports. Understanding the long-term
structural causes precipitating this, however, requires a sojourn into its miraculous
historical development experience.
Formative in the miraculous development of SK through the Cold War was the
“intense, brutal, and deeply architectonic” (Kohli, 2004: 18) legacy of Japanese
Colonialism. While SK had ostensibly gained independence from Japan following the end
of WW2, many of the institutions, structures and organisational principles developed
under colonialism remained. In the private sector, the zaibatsu model of concentrated,
state-directed industrial organisation (albeit with some managerial differences courtesy
of the Shareholder Value Revolution) provided a template for the emerging chaebol
system (Vogel, 1991: 54). In the public sector, the government, through fervent
bureaucratisation and the formation of the Korean Central Intelligence Agency in the
postcolonial Thermidorian reaction, established a “highly bureaucratized, penetrating
and architectonic state” which imposed a “repressive social control of the working
classes” (Kohli, 2004: 64). Critically, this allowed Park Chung-Hee to pursue export
orientation earlier than most other developmental states and foster closer “state
business relations” (Ibid: 96) elevating the power of the Chaebols (through embedded
autonomy) and by “[purging] all uncertainties from the body politics … [enable the state]
to make a Big Push” in Heavy-Chemical Industries (Jung-En Woo, 2002: 333).
And yet, this oligopolistic Chaebol-headlined “Big Push” in HCI in the 60s and 70s
(most of which crucially were, and remain, energy-intensive) was grafted onto a
peninsula virtually devoid of hydrocarbon reserves (IEA, 2024). In Heckscher-Ohlin
terms, SK’s factor endowment – while on the one hand supporting industrialisation and
innovation through the politico-situational “creative insecurity” (Zachary Taylor, 2016)
endowed on it by a “fear of the north” (Vogel, 1991: 46), concomitant latecomer
advantages supplied through geopolitical favouritism by the U.S. and Japan, and its large,
disciplined labour base suitable for the creation of “industrial labour” (Gerschenkron,
1962: 8-9) – made energy import dependence an inevitable corollary of any serious
industrialisation drive. Compounding this, locked into an alliance with the U.S., SK was
also severed from nearby Soviet oil reserves – an enduring geopolitical constraint that
SK’s renunciation of Russian crude in 2022 continues to demonstrate. Consequently,
through the 1970s, SK established heavy crude supply chains in the ME – the only viable
alternative – which grew increasingly entrenched through SK’s construction of heavy
crude refineries and ME FDI (Reuters Staff, 2014). Post Cold War, path dependency and
sunk cost fallacies reinforced this orientation: Korean refineries had been built to process
ME crude grades, so shifting to alternatives like U.S. light crude would have required
costly infrastructure retooling (Ibid). Given the dearth of options available to SK today –
clearly too costly.
Yet today, the consequences of this dependence do not only constrain SK
domestically and economically – they also strengthen adversarial actors in the region and
hand them coercive leverage. With alternative supply routes limited, Russia could offer
discounted crude to fracture Western solidarity – leveraging SK’s desperation to fund its
own war effort, while China – whose asymmetry of interdependence with SK is
temporarily heightened by the disruption – could exploit the moment to deepen SK’s
structural dependence, building leverage that could later be weaponised (Farrell &
Newman, 2019) to discourage alignment with Washington in a conflagration over Taiwan
or comparable crisis.
Ultimately, however, in the short-term, SK will likely pursue energy-saving
measures, while in the long-term perhaps looking to finally diversify its energy mix
through a renewables push or retooling existing refineries. Yet, the KRX’s 12% single-day
plunge has already prompted capital flight and placed severe downward pressure on the
won. Per the Mundell-Fleming trilemma, this leaves the BOK in an acute bind: raising
rates to defend the won and anchoring inflation expectations risks deepening the
contractionary effects of an energy shock that is already squeezing corporate margins
across the chaebol-dominated export sector, while loosening policy to cushion domestic
demand could accelerate capital outflows – all while managing rising domestic
discontent. Together with the lingering effects of U.S. Liberation Day tariffs, this narrows
the BOK’s room for manoeuvre threatening to transform what might otherwise be a
manageable exogenous shock into a full-blown recession.
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