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South Korea’s Reform Crisis

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Pacific Money

South Korea’s Reform Crisis

South Korea’s much-needed economic reforms have faded from discussion, thanks to a sensational political scandal.

South Korea’s Reform Crisis
Credit: Flickr/ JoopDorresteijn

South Korean President Park Geun-hye’s “474 Vision” of reform is a distant memory, as a political crisis threatens to derail her administration. Can Asia’s fourth-biggest economy weather the storm?

On Saturday, hundreds of thousands of protesters gathered in central Seoul to demand the president’s resignation over an influence-peddling scandal involving her confidante, Choi Soon-sil. According to organizers, some 600,000 people attended the rally at Gwanghwamun Square, barely a kilometer from the presidential office, although police put the turnout at 180,000.

The protest was the latest in a series of rallies, including an estimated 1 million-strong candlelit rally the previous weekend, one of the largest anti-government protests in decades. The Diplomat noted that the nation’s first female president now has an approval rating of just 5 percent overall, and zero percent for Koreans aged under 30.

The crisis worsened Sunday after Lee Young-ryeol, head of the Seoul Central District Prosecutors’ Office, indicted Choi and two former presidential secretaries, An Chong-bum and Jeong Ho-seong, on charges including abuse of power. According to Lee, the president allegedly helped Choi extract donations from some of the nation’s biggest companies for Choi’s non-profit foundations, while also providing her with access to classified information.

Prosecutors were reportedly seeking to investigate Park for her alleged role in the scandal, making her the first South Korean leader to be targeted as a suspect in a corruption probe while still in office. Under the nation’s constitution, a sitting president cannot be indicted unless on charges of treason, but Park could be prosecuted if she resigns or is impeached.

“Park should step down,” the People’s Party, South Korea’s second-largest opposition party, told Bloomberg News. “Park’s collusion and her status as a criminal suspect for the prosecutors’ investigation meet the requirement for impeachment.”

Should Park resign her post, an election would be required within 60 days. However, as the financial news service noted, Park has shown few signs of quitting, having recently resumed official duties, including appointing new ambassadors. She is also still scheduled to attend a summit meeting with China and Japan in Tokyo next month.

Chaebol Threatened

The crisis has also engulfed South Korea’s family-owned chaebol conglomerates, with top executives facing questioning over the scandal. Samsung Electronics was criticized by a People’s Party lawmaker for providing $3 million for a Choi company in Germany which allegedly “bankrolled Choi’s daughter’s horseback riding.”

The largest opposition party, the Minjoo (Democratic) Party of Korea, has said major conglomerates that contributed to Choi’s foundations should be investigated as accomplices. A large number of Korean businesses could face scrutiny, amid reports that Choi’s foundations received around 75 billion won ($63.5 million) in donations from more than 50 companies.

Already, nearly 10 top leaders of major conglomerates including Hyundai Motor, Lotte, and Samsung have been questioned by prosecutors, with many more set to face live televised hearings in the National Assembly in coming months.

The companies are reportedly being probed over donating money in exchange for favors from the government, such as “closing acquisition deals, granting pardons to corporate leaders serving time in prison, or gaining access to information from tax offices and prosecutors,” Japan’s Nikkei newspaper said.

Such public scrutiny is likely to damage consumer confidence in the nation’s corporate elite at a time when their image is already suffering from recent scandals. Samsung Electronics was forced to cancel its flagship Note 7 smartphone at an estimated cost of more than $6 billion due to product defects, while Lotte has faced a corruption probe involving 22 current and former officials.

Seoul was also forced to extend a $9.6 billion lifeline to the nation’s troubled shipbuilders due to a downturn in orders and increased competition from China. The bankruptcy of Hanjin, once the nation’s largest shipping company, highlighted the problem of companies considered “too big to fail.”

With a little over a year left in office, Park has struggled to implement her promised vision of “4 percent economic growth, 70 percent employment, and $40,000 per capita income,” amid speculation that the nation’s export-driven development model has run its course.

“Having no control-tower for economic policies would not have mattered much during an economic boom, but it’s worrying when policy coordination is needed,” said Hongik University economics professor Jun Sung-in.

Household Debt Surge

South Korea’s gross domestic product (GDP) eased to a 2.7 percent expansion in the third quarter, down from 3.3 percent in the previous quarter, amid a slowdown in manufacturing and construction that was blamed on Samsung’s smartphone recall and strikes at Hyundai Motor.

With the economic sentiment index remaining below favorable levels, ANZ Research said on November 11 that “economic activity will likely stay subdued for some time… [while] the persistent rise in household debt continues to limit the monetary space to support an ailing economy.”

Household debt reached an historic high of $1.1 trillion at the end of June, amid a housing boom. However, analysts including the Korea Economic Research Institute expect GDP to contract in the fourth quarter, despite government forecasts of around 2.5 percent growth this year and next.

In its latest annual review, the International Monetary Fund said South Korea’s economy faced “a number of structural headwinds, including unfavorable demographics; heavy export reliance; pockets of corporate vulnerabilities; labor-market distortions; lagging productivity; a limited social safety net; and high household debt. Inequality and poverty are also of concern.”

Nevertheless, the IMF said it still expected GDP growth to reach 2.7 percent this year and 3 percent in 2017, based on “growing private consumption, a stronger housing market, and the impact of fiscal and monetary easing” despite “difficult” export prospects.

The latest World Economic Forum global competitiveness survey ranked South Korea 26th, well below Asian competitors such as Japan (8th), Hong Kong (9th), and Taiwan (14th), although still ahead of 28th-placed China.

In October, the Korean won slipped by 3.7 percent against the dollar, while the benchmark Kospi stock index dropped by 1.7 percent, among the worst performances in the region.

Yet while financial markets fret, South Korea faces the prospect of a “lame duck” president until Park’s term expires in February 2018, unless there is an early exit by the woman recently ranked by Forbes magazine as Asia’s most powerful female leader.

South Korea’s economy has weathered previous shocks, such as attacks from North Korea and the Sewol ferry disaster. But with the nation’s major companies under pressure, a more challenging external environment on the horizon, and a power vacuum at the top, Koreans can only hope for a quick resolution to the crisis.