Korea Marches Out of Sync; The gap between consumption and export growth is at its widest level since the crisis, rendering the economy extremely vulnerable.

Byline: Ruchir Sharma (Sharma is co-head of global emerging markets at Morgan Stanley Investment Management.)

South Korea has become a conspicuous oddball in a world where economic conformity is increasingly the norm. While central bankers from Mexico to Australia are all debating how much to raise interest rates, in South Korea the men in gray suits are looking to take rates the other way. This is surprising for an economy that should be very sensitive to international trends, since exports make up more than half its GDP. It's even more counterintuitive that South Korea has to consider stimulating the economy at a time when some of its top companies are emerging as major global brands.

Policymakers in South Korea are more worried about the moribund domestic economy. Consumption is weighed down by a high debt burden, falling asset prices and a rigid labor market. Samsung, LG Electronics and Hyundai Motors appear to represent the new face of a reformed Korea, but all these companies are setting up production facilities outside the country, leaving an increasing number of young graduates unemployed at home. Official statistics don't capture the angst in the Korean labor market, but unofficial estimates suggest the actual unemployment rate in the 18-to-30 age group could be in the region of 15 to 20 percent.

The policies of President Roh Moo Hyun have contributed to the domestic malaise. The left-of-center leader, who took office early last year, has focused on equal distribution of wealth and corporate reform, which has led to many wealthy Koreans' taking capital out of the country and has deterred local hiring. Korea has the second highest labor costs in Asia, behind only its idol Japan, and the Organization for Economic Cooperation and Development says Korea has the second strictest employment-protection laws in the OECD universe, after Portugal. That's why Korean multinationals are moving operations to India and China.

Unlike most other governments in the world, which have generally encouraged a rise in property prices to fuel consumption, the Roh government has actively intervened to prevent speculators from pushing up prices, in the name of protecting affordable homes for the poor and middle class. With nearly two thirds of Korean household assets invested in property, a sclerotic real-estate market acts as a drag on consumers' balance sheets, which are already reeling from a debt buildup between 1999 and 2002, before ...