In the spotlight as the country confronts regional and domestic unrest, South Korea faces an uncertain economic future. South Koreans are simultaneously dealing with a recent impeachment of their president, the election of a new president on a platform of aggressive reform, and a nuclear-equipped adversary to the north that grows ever more belligerent. The new president’s promised economic reforms are also raising questions about the potential impact on a key U.S. ally and trading partner.
South Korean President Moon Jae-in won a special election May 9 following the impeachment of former President Park Geun-hye. Moon promised voters he would go after government and corporate corruption, particularly the ties between government and large family-owned conglomerates, known as chaebol, that have played a dominant role in South Korea’s economic growth. Examples of these companies include Samsung and Hyundai.
The Emerging Markets Traders Association explored what the situation could mean for regional security and the South Korean economy during an event Monday in New York City. Bill Richardson, the former U.S. Ambassador to the United Nations, shared his thoughts on the region during the event.
“[Moon’s] pledge for reforms has been well received by South Koreans,” Richardson said. “We have a situation where the dynamics of the region are changing. What’s going to happen with this commitment to open up dialogue with North Korea? What’s going to happen with the South Korean economy? I think it’s too early to judge what’s happening.”
Richardson has served as a governor of New Mexico, U.S. congressman, and U.N. ambassador. The Korean Peninsula has been an important aspect of his foreign-policy focused political career. Richardson believes the new president should first try to stabilize the economy so that the country can better handle foreign threats and other challenges.
Former President Park sits in jail after divulging state secrets and colluding to accept bribes. The scandal has led to calls for significant reforms, and Moon won the presidency by a wide margin on a promise to pursue reforms that root out economic corruption. Investors and experts on the region, however, are urging caution against impulsive reforms that could drastically reshape the South Korean economy.
“I’ve heard some very good things about this president,” Richardson said. “His thirst for reform, young people supporting him. But as he sets out to make changes, I think the devil will be in the details. No one is certain what his policies are going to be in the short run, and many years down the road. And I think this has brought some concerns to investors.”
Moon has said he will target the chaebol in his reform efforts. This could substantially impact the economy. Unlike in the U.S. where even the largest companies remain a small piece of the total economy, the assets of the 100 largest chaebol are equal to those of the South Korean government. Samsung alone is responsible for 20 percent of South Korea’s economy.
But Samsung, like other chaebol, is facing tremendous future uncertainty with its leader, Jay Y. Lee, on trial and looming investor fears that President Moon may act rashly in his pursuit of prosecuting business leaders and in implementing structural reforms to the chaebol that could harm South Korea’s most important economic engines.
The concern from skeptics of Moon’s possible reform of a large swath of the economy, as explained by a writer in Investor’s Business Daily, is: “Liberal economic reforms and breaking up successful businesses could weaken South Korean companies and make it harder for them to compete globally.” South Korea’s economy is already facing increased pressure from China’s growing economy, and President Donald Trump’s stance on trade may also impact the country.
The Organisation for Economic Co-operation and Development (OECD) found the recent political unrest has taken a toll on the South Korean economy. The gross domestic product (GDP) declined late last year in the face of domestic and international challenges. The economy, however, is expected to start turning around once everything settles.
“GDP growth declined in the latter part of 2016 in the context of political uncertainty, corporate restructuring and a drop in exports,” OECD detailed in a recent report. “Assuming that domestic and international political uncertainty dissipates, growth is projected to edge up to 2.8% in 2018, supported by a pick-up in exports and rising business and consumer confidence.”
The OECD is an intergovernmental organization founded to promote economic progress and world trade. The report also notes that South Korea has helped to improve its own place in the global economy by joining over a dozen free trade agreements since 2003.
“The South Korean economy has recently been growing faster than expected coming off a laudable leadership transition in the wake of the scandal surrounding President Park Geun-hye,” said Kyle Ferrier, director of research at the Korea Economic Institute of America, in an interview with InsideSources. “South Korea’s key stock market index, the KOSPI, is at an all-time high.
Ferrier adds exports and investments related to increased demand for high quality semiconductors have been the catalyst for this recent growth. He notes the pace at which interest rates increase and the buildup of household debt remain the key economic risks to watch.
“At the same time, despite the scandal, the South Korean economy is doing pretty well,” Richardson said Monday. “Not just among Asian countries, but among other major industrialized countries. Moon must balance how to tackle reforms, how to take on reforms, without rattling the unique structure of the South Korean economy.”
Moon has also pledged to open up a dialogue with North Korean dictator Kim Jong-un. Ferrier says that pressure from the north is likely doing little to impact the South Korean economy, but increased tensions in the region have raised concerns.
“North Korean provocations have had a minimal impact on the South Korean economy in the recent past,” Ferrier said. “Increased tensions after U.S. President Donald Trump’s promise to more aggressively approach North Korea seemed to have raised market concerns about the long-term geopolitical stability of the Korean Peninsula, though the impact of those concerns has arguably been minimal and short-lived.”
President Donald Trump has been focusing on the region in recent months as North Korea has become more provocative. The United States and South Korea are key allies. Richardson believes the Korean Peninsula poses the first major foreign policy test for Trump.