South Korea’s Market Reforms Won’t Turn Its Economy Around

Korea appears to be careening toward the kind of multidecade funk that long characterized its neighbor, Japan. The new plans will do little to dispel those fears. 

The parallels are inescapable. Korean President Yoon Suk-yeol’s team rolled out the plans just as Japan’s Nikkei 225 Stock Average hit 34-year highs, to act to boost the value of Korean companies.

The benchmark Kospi index rallied to 20-month highs last week amid optimism over Seoul’s “Corporate Value-up Program.” The index fell 0.77% Monday, when the plans were released, and another 0.83% on Tuesday, before rallying. That brief exuberance masks a far bigger problem Korea faces in relation to its economic rival: so-called Japanification.

Today, economists are scouring the globe for places at risk of a prolonged period of low growth, weak inflation, and ultralow interest rates. Japan’s episode was brought on by the collapse of a real estate bubble in the early 1990s.

Naturally, China tops the watch-list as a property crisis exacerbates deflation. Germany gets mentioned as a potential candidate for an economy that might have trouble getting up after a fall. India, given the nation’s debt-plagued banking system. Thailand, too, thanks to chronic political chaos.

But Korea may have the hardest time of all explaining away concerns that Asia’s fourth-biggest economy is careening toward secular stagnation.

“In Korea, so many people are concerned we’re going to be like Japan — but that it could be worse,” says economist Jaejoon Woo, author of Confronting South Korea’s Next Crisis: Rigidities, Polarization, and Fear of Japanification.

In April 2023, Bank of Korea Governor Rhee Chang-yong began adding discussions about secular stagnation to speeches. That’s when markets began buzzing about stagflation in Korea, as inflation outpaced both economic growth and wage increases. Since then, Yoon has been too preoccupied by scandals and squabbling with opposition parties to raise Korea’s economic game.

That background helps explain why this week’s much-hyped package of reforms fell flat. 

Investors hoped for more than vague promises that companies championing shareholder returns will enjoy “bold incentives” and tax benefits. The same goes for the lack of enforcement or measures to protect the interests of smaller shareholders over controlling ones, often the founding families who run the conglomerates towering over the nation’s 51 million people.

The Financial Services Commission dropped the news three weeks after some investors were surprised by the outcome of a case against the leader of the biggest conglomerate,
Samsung.

On Feb. 5, a Seoul court acquitted Jay Y. Lee on stock manipulation and accounting fraud charges. They were related to an internal 2015 merger of Samsung C&T and Cheil Industries, aimed at, prosecutors alleged, strengthening the family’s control at the expense of shareholders. Lee has denied wrongdoing.

Investor concerns about these sorts of opaque intra-conglomerate transactions are part of why Korea’s stock market trades at a discount to peers.

Yoon, who took office in May 2022, is the fifth elected president in the last 20 years to pledge to create a more dynamic and stable economic system. Especially since 2008, the year index giant MSCI put Korea on its developed-market watchlist, government after government has tried to grab the reformist mantle—with no success.

The most notable was Park Geun-hye, a conservative, who became president in 2013. Korea’s first female leader pledged to level playing fields to build a more “creative economy.” That meant reducing the overwhelming dominance of family conglomerates, or chaebols, to make space for scrappier small-and-medium-sized enterprises to generate economic energy from the ground up.

Instead, Park got co-opted. In 2017, she was impeached over a corruption and cronyism scandal that exposed deep links between politics and Korea’s corporate giants. In 2018, Park was sentenced to 24 years in prison (she was later pardoned). Park’s successor, the more liberal Moon Jae-in, campaigned on a platform of reining in chaebols and their monopolistic ways. He didn’t.

Now it’s Yoon’s turn to talk about upending the corporate status quo—and do little about it. Yoon took office promising to reduce government debt while devising a private sector-driven “fair and innovative” economy.

As 2024 unfolds, growth and wages are stagnant, household debt is at record high of $1.41 trillion, productivity is flatlining and the population is aging fast. Korea’s fertility rate is setting new record lows each year—global lows. It’s around 0.7 children per woman versus 1.3 in Japan.

It’s not that Korea lacks a vibrant startup scene. The problem is a lack of antitrust enforcement. Chaebols can buy, destroy, or marginalize any upstart they see as a threat. A succession of governments punted rather than do the hard work of creating economic space for startups and SMEs.

The fallout from this chronic complacency will sound familiar to students of Japan’s lost decades. The answer, of course, is bold structural upgrades that reduce bureaucracy, increase innovation and productivity, prioritize talent and merit over seniority-based promotions, empower women, and scrap outdated regulations that preserve the dominance of the family conglomerates. Monetary easing alone can’t fix Korea’s malaise.

In top-down Korea, regaining the reformist momentum will require courageous and forward-thinking leadership. Sadly, time isn’t on Korea’s side to avoid an economic trajectory from which Japan is only now recovering.

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