One of the key elements of our forecast for 2016 relates to how countries dependent on the export of industrial products will respond to China’s slowing growth. In that forecast, we identify South Korea as a country substantially at risk, in no small part due to the fact that China is South Korea’s biggest trading partner, with over 25 percent of exports going to China and over 17 percent of imports coming from the country. Though the precipitous decline in South Korean exports indicates economic trouble for Seoul, there are worrying signs of political instability and stalemate that concern us even more.

Three developments tied to South Korean President Park Geun-hye’s office have popped up on our radar screen this week. On Dec. 15, a senior presidential secretary made a request to the speaker of South Korea’s National Assembly Chung Ui-hwa to invoke his authority as speaker to bypass the normal legislative process and bring a set of labor reform bills to a vote on the floor. The speaker, however, declined to do so, explaining that he did not consider South Korea to be in a state of emergency – significant because Chung can only invoke this authority in the case of a natural disaster, state emergency or unity agreement between rival parties. On Dec. 16, while addressing a meeting of officials on South Korea’s economic policy for 2016, Park called for an “economic contingency plan” to prepare the country for a possible economic crisis. In addition, on Dec. 18, Park said she was losing sleep over the current state of the South Korean economy in a meeting with local business leaders.

South Korean export numbers are thought of as a bellwether in the global financial community because they are released consistently at the beginning of the month and because South Korea is a producer of a wide variety of goods. These numbers have been negative all year and year-to-date South Korean exports are down 7.5 percent. However, this decline has been ongoing for at least 11 consecutive months now. It is not a surprising development, nor is the fact that the finance ministry has revised its projections for growth in 2016 down to 3.1 percent from 3.3 percent. This revision reflects the fact that growth in 2015 came in at 2.7 percent, lower than the projection of 3.8 percent.

south-korean-exports

What makes this notable from our perspective is the impact of this expected decline on South Korean domestic politics. Like neighbors Japan and China, the South Korean government has made maintaining a stable level of employment an essential aspect of national fiscal policy. In fact, Park made it one of her main objectives to reform labor laws in the country and in September 2015 she succeeded in getting labor, management and government officials to reach a compromise deal on laws that would ease labor restrictions in the country.

Park and her allies, including many of the conglomerates that have played such an integral role in South Korea’s development as an industrial power, want to see labor laws reformed so that hiring and advancement is based more on merit than seniority and firing unproductive or low-performing workers is easier. Other reforms relate to work hours and unemployment insurance. The pressures on South Korea’s export-driven economy have Park and the ruling party attempting to pursue policies aimed at increasing profits through improving efficiency rather than ensuring stability with reliable employment.

Official unemployment statistics in South Korea indicate that unemployment is somewhere between 3 percent and 4 percent, and in October official statistics said the unemployment rate had fallen a tenth of a percent to 3.4 percent. This, however, does not tell the whole story. Bloomberg noted earlier this year that underutilization of labor in South Korea is relatively high. Furthermore, the rate of youth unemployment, defined as job seekers between the ages of 15 and 29, was at 8.1 percent in October and had broken 10 percent earlier this year. In some ways then, Park’s reforms should not only be seen as a change in South Korean policy but also as a realization that the old policies are not working – employment as a guarantor of stability only works if young people feel confident that they will receive the same opportunities that prior generations did.

There has been significant backlash, however, to Park’s plans. The laws themselves have not progressed through the assembly and the speaker is unwilling to use his powers to fast track them through the assembly. And with parliamentary elections coming up in April, politicians are beginning to position themselves for elections and are unwilling so far take up discussion of a high-profile bill that faces a great deal of opposition in the country. Although Park herself won’t face elections until 2017, she has made these reforms a priority.

Protests in Seoul on Nov. 15 against the proposed labor laws numbered somewhere between 60,000 and 130,000 people, as activists representing workers, farmers and trade unions, including the large Korean Confederation of Trade Unions (KCTU), expressed displeasure at what they see as changes that benefit the ruling and upper economic classes. Protests held on Dec. 5 were smaller but again numbered in the tens of thousands and necessitated the deployment of 18,000 additional South Korean police to the capital. Calls for a general strike on Dec. 17 did not materialize, but smaller strikes were carried out. In one example, Hyundai Motor Company’s unionized workers went on a half-day strike on Dec. 17. Another round of protests is being called for Dec. 19 and we will be watching to determine whether the popular opposition to Park strengthens into more than an expression of anger and frustration with her proposed laws.

Despite this opposition, both Park’s approval ratings and her Saenuri Party’s ratings are over 30 percent, which is considered high in South Korea. The KCTU has called for general strikes before but they have not been large enough to have an impact. The last time those strikes actually materialized was between Dec. 1996 and Jan. 1997, in response to labor laws that attempted to reform the automotive and shipbuilding industries. The strikes resulted in over a month of large-scale general strikes that culminated in the repeal of the labor labor laws.

However, the current situation is not even close to that level yet and may not get there. South Korea’s trade balance rose to a $10.4 billion surplus in November, although this is not necessarily entirely positive as it indicates imports are contracting more than exports. South Korea is also not planning on slashing spending; on the contrary, its projected budget for 2016 is $1.6 billion higher than last year.

It is worth also noting that the 1997 Asian financial crisis began in July of that year, just seven months after the domestic crisis in South Korea, which in the end necessitated temporary labor reforms to ensure that South Korea could receive funds from the International Monetary Fund, although there was not necessarily a causal relationship between the two events.

The situation in South Korea is not yet dire, as the decline in South Korean exports has been ongoing and expected. What concerns us is whether or not we are seeing the first signs of a larger crisis that, if it consumed South Korea, would have global economic and political ramifications. The urgency of President Park’s public statements expressing worry about the economy, the apparent paralysis of the South Korean National Assembly and the prospect that large-scale protests could gain momentum of their own are things that keep us up at night too.