Fisher Investments Editorial Staff
Geopolitics

Inside Korea’s Election

By, 12/20/2012

South Koreans chose their next president Wednesday, electing the ruling Saenuri party’s candidate, Park Geun-hye, over the Democratic United Party’s (DUP) Moon Jae-in.

Understandably, most media coverage focused on the historical implications: Park, who won 51.6% of the vote, is the daughter of former military dictator Park Chung-hee, and she will be Korea’s first female president. Her ability to tear down gender barriers in Korean politics and break with the negative parts of her father’s legacy is a huge milestone in Korean democracy.

As ever though, we’re focused on the economic implications of political change—both within Korea and globally. South Korea’s a key exporter of autos, televisions, appliances and electronics, just to name a few, and the free trade agreements (FTAs) it’s signed in recent years benefit consumers globally. Korea also has a large consumer class, which can be an even bigger contributor to global demand growth if more trade barriers fall.

And on the free-trade front, there are plenty of reasons for optimism. Park supports the trade policies of outgoing President Lee Myung-bak, and she’s pledged to uphold FTAs with the US and EU. Historically, free trade’s been a tough sell in Korea—demonstrations against the US FTA brought tens of thousands of protestors into Seoul’s streets and drove one member of parliament to tear gas the National Assembly when he felt the agreement would sail through. So when Moon campaigned on revising the US FTA, there was a risk voters would rally behind protectionism. That they ultimately voted for free trade—as they did when they renewed Saenuri’s legislative majority last April, when the DUP campaigned on repealing the FTA—might speak to a slight shift in the popular mentality. This could give Park even more freedom to pursue new FTAs. Mass protests, after all, can make campaign pledges a bit tough to fulfill even when the president’s limited to a single five-year term, as legislators still need to face voters every four years.

On domestic economic issues, there’s a bit more uncertainty. This election’s theme was “economic democratization”—how to help more Koreans reap the benefits of rapid economic growth. Korea’s something of an economic marvel. As recently as the 1950s, Korea was an agrarian society ravaged by the Korean War. But under Park Chung-hee’s heavy hand, the nation rose from the ashes and rapidly industrialized during the 1960s and 1970s. One big reason for Korea’s economic miracle then and the ensuing decades of gangbusters growth and global emergence is the mega-conglomerates that dominate Korean industry, known as the chaebol.

The chaebol rose to prominence under Park, who showered them with massive subsidies, generous tax breaks and heavy trade protections, allowing them to grow exponentially, become big global players, and carry the entire country into the modern era. The scheme worked—these companies dominate Korea’s economy and are major global players. Many indexes now recognize Korea as a developed economy as a result, and Koreans enjoy a very high quality of life. But wealth remains concentrated among the chaebols’ controlling families and their closest supporters, which gives them a ton of political clout (providing fodder for corruption). And because the chaebol comprise the lion’s share of Korean industry, domestic competition is limited and employment options are few. Hence, “economic democratization”—seemingly a euphemism for chaebol reform.

Park campaigned on a reform-lite platform, and she watered down her proposals as the election neared. Unlike Moon, she doesn’t want to break up the chaebol by unwinding the cross-shareholdings that allow the ruling families to retain executive control despite their minority shareholdings in the central holding companies. Rather, she pledged to ban all new cross-shareholdings, believing this will improve corporate governance and limit corruption in the long run without causing near-term disruptions that could threaten Korea’s economy. Over time, the relationships between the holding companies and subsidiaries would weaken, theoretically opening markets to smaller businesses and entrepreneurs—chaebol affiliates and subsidiaries would no longer automatically award contracts to each other. They’d have to compete. Whether or not this happens will take years to see. In the near term though, less intervention in corporate Korea is probably a positive—it should give firms more room to continue investing and growing, without the looming threat of forced break-up.

Of course, that doesn’t mean Korea’s current economic system is ideal—more domestic competition would bring more economic opportunities for businesses, entrepreneurs and employees, and wages would likely rise as more businesses compete for workers. But freer trade can help here. By removing the huge trade protections around the chaebol and further opening Korea to foreign competition, markets can fragment a bit, lowering barriers to entry for new domestic participants. And foreign firms opening offices in Korea can broaden Koreans’ employment options. Currently, Korea’s negotiating a trilateral free-trade pact with Japan and China and a 16-member Asia/Pacific free-trade region. How these talks progress once Park takes office will be a story to watch in 2013.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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