South Korea’s New President, in Trying to Develop Economic Policy, is Caught up in Geopolitics.
South Korea’s new president, Moon Jae-in, in his first two months in office is trying to ease the country’s relations with North Korea just as his liberal predecessors, Kim Dae-jung and Roh Moo-hyun, sought to do. Moon opened the door to negotiations and even a summit with the North’s Kim Jong-un, but he has also spoken critically of the North’s missile tests and, with a missile firing and flyovers conducted with the United States, flexed the South’s military muscles.
Moon’s economic strategy is unfolding in a similar manner, with ideas that are like those of the progressive leaders past and some tactics that show he recognizes when difficult choices are needed.
In the brief presidential campaign in March and April, Moon said he would try to bolster the South Korean economy through a massive jobs program with government at the center. He pledged to add 800,000 to the country’s base of 2.3 million public-sector jobs. He also promised a laundry list of government aid, including new payments to parents of children under five, to jobless adults between 18 and 34, and to nearly everyone over 65. Higher taxes on corporations and wealthy individuals would help pay for it all. All those moves befit Moon’s role as the first left-leaning president in nearly a decade.
But since taking office in May, Moon has chiefly focused on North Korea policy and on his first meetings with President Donald Trump in Washington two weeks ago and other world leaders at the Group of 20 (G20) last week. The government did front-load its spending for 2017, with 59 percent disbursed through June 30, in an effort to help the economy. And Moon proposed adding 11 billion won to the 2017 planned total of 281.7 trillion, a supplement lawmakers are still considering and that a surprise jump in first-half tax collections will ease.
Broadly, South Korea at the moment is like other global economic powers, grappling with slow growth and new uncertainties about trade that have been created by the United States under Trump. The South Korean government’s fiscal condition is good. And exports have shown bigger increases than imports this year, chiefly due to memory chips and oil. South Korea is an underappreciated player on the global energy scene, with refinery capacity that serves China as well as its own needs. And its world-leading makers of memory chips, Samsung and SK Hynix, are benefiting from the first simultaneous upturn in the pricing cycle of both kinds of such chips (DRAM and NAND) since 2004. That has created huge surges in revenue and profits for the companies and spikes in their share value that drove an 18 percent first-half gain in the country’s broad-market Kospi index.
Elected on wave of voter discontent about the economy, corruption, and perceptions about unfairness of opportunity, Moon still faces numerous challenges in the South Korean economy that call for more difficult choices than the progressive formula allows. To start, he should not be content with South Korea’s level of growth (below 3 percent this year) or its growth potential. As well, South Koreans’ household debt, shaped in part by education spending, continues to choke discretionary spending and growth of consumption. The country also continues to lag other developed nations in workforce productivity and diversity.
There are signs Moon gets these structural challenges. At the G20 and at various events during his time in Washington, Moon spoke forcefully in favor of free trade, even in the face of Trump’s anger at the post–free trade agreement widening of South Korea’s goods surplus with the United States. He is pushing state-run organizations to change to a “blind” hiring process, meaning managers will no longer be able to ask about academic and family backgrounds and candidates won’t have to submit photos on their resumes. That step may erode some the country’s notorious workplace discrimination, but it won’t really be effective unless Moon extends it by law to the private sector. Moon wants companies to reduce working hours and has even declared that he will take the full 21 days of vacation he is allowed. That’s something no president has ever done and, as a result, in the Korean hierarchical tradition meant that few government officials below president ever took their proper time off. Lee Myung-bak’s government attempted a solution, but Lee didn’t participate and the effects were comical. South Koreans work the longest hours of any developed country, in part because of the pressure to keep up appearances with bosses and colleagues. That’s a big reason they are so inefficient.
With North Korea’s provocations commanding so much attention, it’s doubtful Moon will be able to use the honeymoon days of his term to tackle bigger structural issues, such as labor flexibility, farm subsidies, or the chokehold of South Korea’s large conglomerates, or chaebol, on capital and competitiveness. Moon’s appointee to lead the Korea Fair Trade Commission, Kim Sang-jo, a shareholder rights activist with the nickname “chaebol sniper,” used his first appearance to instead announce the agency wants to regulate two U.S. technology firms, Google and Facebook.
The North Korea matter is at the heart of another complication in the development of economic policy at the start of the Moon presidency. China, South Korea’s largest trading partner, since late last year has systematically penalized the country for its deployment of a U.S. weapons system, the Terminal High Altitude Area Defense battery, or THAAD, meant to defend it from North Korean missiles. In an appearance at CSIS at the end of his trip to Washington, Moon estimated the pressure has cost South Korea $8 billion so far. That’s a relatively small amount for a country with a $1 trillion economy, but it is no doubt an undercount.
China has sharply curtailed issuance of tourist visas to South Korea, a step that could lead to about 4 million fewer visitors this year. (The worst impact has been on Jeju Island, where 3 million Chinese have visited annually in recent years.) Chinese consumers, spurred on by government and nationalist bloggers and media, are boycotting Korean brands. Lotte Group has taken the brunt of the effect, in part because a former Lotte golf course is the site of the first THAAD installation. But earlier this week, Hyundai Motor Group disclosed that it formed an emergency task force to deal with plunging sales in China, which had become its biggest market and where it now produces almost as many cars a year as it does in Korea. Sales by units have been down more than 50 percent for both its Hyundai and Kia brands in China this year, and they were off more than 60 percent for both brands in June. Hyundai’s losses alone in China exceed $4 billion.
Moon confronted Premier Xi Jinping of China about the economic pressure at the G20 and asked him to end it. Xi replied that South Korea should “remove obstacles to the improvement and development of bilateral relations,” a rebuff wrapped in an indirect reference to THAAD.
In the aftermath of North Korea’s July 4 missile launch, many analysts pointed out the limitations of U.S. military options, noting that South Korea would pay the biggest price if the conflict on the peninsula turns into actual fighting. It has always paid some economic price because of the potential for conflict, chiefly in opportunity cost or the so-called Korea discount in stock and bond values. But now South Korea is paying a far bigger cost.
Just as Moon tries to put together strategies for dealing with North Korea and lifting up the South Korean economy, it turns out they are intertwined by the competing priorities of the United States and China. And that’s a much tighter spot than his political role models Kim Dae-jung or Roh Moo-hyun were ever in.