Markets (Page 160)

As Yoon Suk Yeol loses momentum on reforming South Korea, it’s time to ask whether his presidency will be remembered for ushering in a lost economic decade.

Granted, the risk of South Korea bumbling into a Japan-like malaise has been known for many years. Yoon, who next week wraps up his first of five years in power, marks the fourth leader in 15 years who has pledged to avoid this dreaded outcome.

Each took office with bold plans to ease regulations, support startups, increase productivity and reduce the dominance of family-owned conglomerates known as chaebols.

Yet when each saw the scale of the task — and the determination of vested interests to protect the status quo — they pivoted to other priorities.

Twelve months in, odds are rising that Yoon’s will be the fourth administration in a row to avoid the hard work needed to recalibrate growth engines, increase innovation and boost competitiveness.

Surprises can happen, and Yoon has four more years to turn things around. But so far he hasn’t put a single impactful reform win on the scoreboard.

He’s slow-walked steps to loosen labor markets, support young entrepreneurs, make it easier for overseas investors to take bigger stakes in a wider array of companies or trade the won outside of specific time windows.

Yoon has also put geopolitics ahead of economics. In his determination to improve ties with the US, Yoon is siding with Seoul’s leading strategic ally Washington over top trade partner Beijing.

Yoon’s security arrangements with the US could complicate the balance of nuclear weapons diplomacy amid China’s support for North Korea.

“Given the growing threat from North Korea, Yoon has sought to revive US extended nuclear deterrence on the peninsula, requesting and receiving greater deployments of advanced US weaponry such as aircraft carriers, long-range bombers, and nuclear-powered submarines,” says Eurasia Group analyst Jeremy Chan. “Joint military exercises have likewise been expanded in number and size, and increasingly include trilateral drills with Japan.”

At the moment, says Fitch Ratings analyst Jeremy Zook, South Korea’s macro trajectory is stable.

“Korea’s rating balances robust external finances, resilient macroeconomic performance and a dynamic export sector against geopolitical risks related to North Korea, lagging governance indicators and structural challenges from an aging population,” Zook says. “Economic growth is likely to decelerate in the near term, but credit and policy buffers remain sufficient to manage these pressures.”

Still, economist Ha Keonhyeong at Shinhan Securities Co, expects just 0.8% growth for Korea this year. “Despite the rebound,” the economist says, “it’s hard to expect a trend recovery.”

Yet few of Yoon’s recent maneuvers will endear his economy to its biggest customer. Decoupling from Chinese tech makes for a great political slogan at home. But it may limit Korea’s ability to raise its semiconductor game and increase sales to Asia’s biggest economy.

One irony of Yoon’s efforts to cozy up to Tokyo, too, is that his policies risk hastening Korea’s Japan-like trajectory.

In late December, Yoon stressed the centrality of the semiconductor industry to the Korean economy.

“Strategic technologies, such as semiconductors,” Yoon said, “are a national-security asset and our industries’ core technology, so I would like the finance ministry to actively consider ways to additionally expand tax breaks for national strategic industries, including the semiconductor industry, in consultation with relevant ministries.”

Yoon must pick up the pace, policy-wise. Korea is home to the world’s two leading memory chip manufacturers — Samsung Electronics and SK hynix. Both faced cyclical downturns in late 2022 into early 2023.

Yet sliding global demand is a shorter-term problem. South Korea’s failure year after year to execute upgrades at the government level to enliven the industry is creating bigger headwinds. And self-induced ones at that.

Perhaps the best lens through which to view Yoon’s failure is the Shinzo Abe era in Japan. In 2012, Abe returned to the premiership for a second time, pledging a Big Bang of supply-side reforms to take on an ascendant China.

His plans to slash red tape, modernize labor markets, rekindle innovation, support startups, recalibrate energy policies, empower women and restore Tokyo’s role as Asia’s top financial hub excited voters.

Abe also had, from 2012 to 2020, three political benefits no other Japanese leader ever had before: a strong popular mandate; a clear economic blueprint; and plenty of time to engineer major change.

But Abe did surprisingly little to remake Japan’s rigid economy. He left it to the Bank of Japan to reinvigorate growth. By driving the yen 30% lower, the central bank produced healthy growth at times. A dearth of structural reform from Abe’s government, though, dissuaded companies from fattening paychecks and kicking off a virtuous cycle of demand-led growth.

Today, the late Abe is remembered less as Japan’s Ronald Reagan or Margaret Thatcher than as a cautionary tale of a powerful Asian figure who had all the tools needed to remake his nation’s economy — and failed anyway.

In Seoul, Yoon must heed these lessons. The biggest, perhaps, is that new leaders must get big things done very early in their tenure — when they enjoy healthy public support and the benefit of the doubt from populations craving change.

As Abe demonstrated, waning popularity forces leaders to lower their sights and grasp for low-hanging fruit gestures. In Abe’s case, it was modest upgrades to corporate governance. They included a UK-like stewardship code meant to increase turns on investors and prod shareholders to demand change.

Yet more than a decade after Abe promised the world, corporate Japan is still punching far below its weight. Behemoths like Toyota Motor are falling far behind in the electric vehicles race. On the other side of the corporate food chain, Japan is losing the race to create tech “unicorn” startups to Indonesia.

In Korea’s case, creating unicorns is less the problem than a corporate system geared toward legacy family-owned conglomerates that tower over the place. With politically-connected giants like Samsung, LG, SK and Hyundai calling the shots, startups are often deprived of economic space to thrive and disrupt a deeply conservative corporate culture.

Since 2008, four different presidents have arrived promising to level the playing field. First, Lee Myung-bak pledged to generate more economic energy from the ground up. Voters hoped that, as a former CEO of Hyundai Engineering and Construction, Lee had the know-how to shift growth engines away from exports toward domestic demand.

Lee demurred, siding with the family-owned conglomerates, or chaebols, that produced him.

Next came President Park Geun-hye in 2013. It was a milestone moment. Not only was she Korea’s first female president, but also the daughter of former national leader Park Chung-hee, who built the chaebol-led model that still dominates today back in the 1960s and 1970s.

Park Geun-hye took office with grand plans to dismantle her father’s economic system. She talked of devising a more “creative” model of entrepreneurship and shifting tax incentives toward startups.

Park also planned to strengthen antitrust enforcement and penalize big companies for hoarding profits that could be used to boost paychecks and fund new cutting edge research and development (R&D).

At the heart of her father’s export-led development scheme was prioritizing preferential loans to outward-facing businesses and insulating domestic industries from global competition. The strategy borrowed from the “Asian tigers” playbook Japan had written.

Over time, though, Korean governments were captured by the home-growth giants Park Chung-hee’s policies created. But once daughter Park Geun-hye settled into the presidential Blue House, 38 years after her father’s assassination, she too decided change was too difficult and risky.

Months after taking office, Park Geun-hye held a public meeting with the heads of the top chaebol families to ask them to increase investments to help boost growth.

Among them was the late Samsung chairman Lee Kun-hee. He was the father of Samsung leader Lee Jae-yong, who in 2017 played a direct role in Park’s arrest on bribery and influence peddling charges.

It meant that rather than upending the chaebol system, Park got co-opted by it. By 2017, she was impeached and jailed in a scandal involving Lee Jae-yong. Both have since been pardoned, much to the dismay of many Korean voters.

Enter Moon Jae-in, who was elected in 2017 to restore faith in Korean government. Moon began with a bold plan to champion “trickle-up economics.” It included higher corporate taxes to better distribute wealth and job opportunities.

Moon’s emphasis on enriching the middle class was the flipside of the strategies championed by Abe, then-US president Donald Trump and Reagan decades before. Yet Moon, too, saw the magnitude of the task of taming Korea Inc — and he backed off.

By December 2021, Moon even found himself pardoning Park. At the time, Moon’s office said pardoning her would “overcome unfortunate past history, promote people’s unity and join hands for the future. I hope this would provide a chance to go beyond differences in thoughts and pros and cons, and open a new era of integration and unity.”

Since then, Yoon has gone on his own pardoning binge. First came Samsung heir Lee Jae-yong, who was convicted along with Park in 2017. Two months later, in December 2022, Yoon pardoned former President Lee Myung-bak, who was serving a 17-year sentence for a different corruption scandal.

Lost in all these political machinations, though, has been attention to desperately needed economic reforms. What’s more, Yoon’s team seems keener on treating the symptoms of Korea’s challenges than the underlying problems.

Case in point: Yoon’s lobbying efforts for Korea be included on MSCI’s developed market index, which would open it to an entirely new galaxy of global institutional investors. Winning their money is key to ending the “Korean discount” that has long undervalued stocks.

This annual dance between Seoul and MSCI has played out since 1992, when Korea joined the indexer’s emerging markets grouping. Last year, MSCI CEO Henry Fernandez said that “for now, we have not yet seen significant action. So that’s obviously the reason why there was no inclusion in June.”

In 2023, Yoon is pledging to raise Korea’s financial game. He telegraphed steps to allow foreign investors to take bigger stakes in Korea Inc, change “outdated regulations” and extend currency-trading hours. Yoon’s economic team has even hinted at ending the ban on short-selling.

Trouble is, big talk has not been matched with big action – or even a vague plan or timeline for upgrades. In doing so, Yoon suggests he’s not going to be the leader to steer Korea onto a more innovative and productive path.

Yoon should be leaning into the entrepreneurial energy that began to sprout up during Park Geun-hye’s tenure. For all her flaws, Park’s efforts to increase the flow of cash to innovators helped morph Korea into a top-10 global incubator of “unicorns.” Wisely, Moon expanded the program.

Yet big businesses – chaebols – still monopolize the economic oxygen startups need to grow into larger entities that can disrupt the status quo. Nor does Yoon appear to have a plan for raising Korea’s dreadful gender equality rankings.

For years, development economists called Korea underutilizing its female workforce a big own-goal. Studies from the International Monetary Fund to the Organization for Economic Cooperation and Development show that nations and companies that empower women are the most innovative, productive and vibrant.

Yoon, who ran on an “anti-feminist” platform, has yet to address this chronic problem. Or others, for that matter, that might halt the Japan-like trajectory Korea seems to be inviting leader after leader.

Follow William Pesek on Twitter at @WilliamPesek

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