Park Geun-Hye And South Korea’s Long-Term Challenges

South Korea’s new president, Park Geun-hye, took office on February 25. Her immediate task is to prop up a faltering economy that has been saddled with increasingly burdensome household debts. Park will also have to find a balance between fulfilling her campaign pledge of increasing welfare expenditure and preventing a deterioration of the country’s fiscal health. South Korea’s largest conglomerates, or chaebol, will also be high on the agenda, at least rhetorically, as she seeks to introduce some form of economic restructuring. As regards external policy, dealing with North Korea’s increasingly belligerent attitude is likely to be a high priority.

Chaebol Clampdown To Prove Rhetorical

Many South Korean presidents promise to reduce the power of the chaebol during their election campaigns, and most of them fail. We have repeatedly highlighted that the proposed chaebol clampdown that served as a key plank of both presidential candidates’ campaigns was likely to be merely a populist pitch and that reform momentum was unlikely to gain any meaningful traction. True enough, our view appears to be panning out. In the policy roadmap announced by Park’s transition team on February 22, ‘economic democratisation’ was clearly absent from the list of initiatives Park planned to roll out (although she did mention it in her inaugural speech).

Indeed, Kim Chong-in, a co-chair of Park’s presidential campaign and a strong advocate of chaebol reform, was not assigned any senior position within the government. As we observed during Park’s campaign run, her policies were largely growth-oriented. Consequently, making life harder for the conglomerates (which essentially drive Korea’s export-oriented economy) is too risky a move to make, especially against the current economic backdrop. In our view, any reform measures are, at most, likely to take the form of fairer competition laws aimed at preventing the unchecked expansion of the chaebol into unrelated industries, as opposed to breaking them up. Looking ahead, we thus expect the chaebol to maintain their hold on the economy and we do not envision any radical changes to the export-led economic model.

Other Challenges

Aside from the above issues, Park will need to address several long-term challenges. We outlined some of these in early 2008, not long after Lee Myung-bak took office, but we reiterate the key questions below:

  • Can South Korea maintain its edge in manufacturing at a time when China and other lower-cost rivals are emerging?
  • Can South Korea really make itself a key economic/financial hub in Asia?
  • Can South Korea become a knowledge-based economy?
  • How will South Korea deal with a rapidly ageing population?
  • How can South Korea best prepare itself politically and economically for dramatic change in the North?

South Korea is undoubtedly one of the world’s greatest economic success stories of the post-World War II era. However, a failure to tackle the above-mentioned challenges could consign it to the fate of Japan.