South Korea’s next leader must focus on growth

So much attention is being lavished on the nuclear-edged tantrums of Kim Jong-un in North Korea that the presidential election on the southern half of the Korean peninsula has gone practically unnoticed. But the outcome may be nearly as critical for the region’s future as the fate of Mr Kim’s weapons programme.

The main candidates — the Democratic Party’s Moon Jae-in and Ahn Cheol-soo of the People’s Party — have spent much of the campaign debating how to deal with North Korea and ties with the US, which makes sense, given rising tensions between Washington and Pyongyang. On the crucial question of South Korea’s faltering economy, though, neither seems to have sufficient answers. Fixing what ails Korea will require a lot more creativity and boldness than either candidate has so far shown.

South Korea has been among the most miraculous of Asia’s economic miracles. One of the world’s poorest countries in the early 1960s, it has leaped into the ranks of the most advanced. Its big companies make some of the world’s most popular products, while its music and TV shows dominate pop culture across East Asia. Yet that progress has slowed. The economy grew by a less-than-inspiring 2.8% in 2016, and the next president will have to face up to some serious long-term structural flaws.

The biggest challenge is Korea’s impending demographic disaster. Its population is ageing rapidly, due to one of the world’s lowest fertility rates. That hampers growth by hoisting the costs of an army of senior citizens onto a smaller number of productive adults. The working-age population has probably peaked and is expected to shrink by 1% annually over the next 20 years.

Mr Moon has spoken about wooing more of Korea’s highly educated women into the workplace, which should help. A 2015 paper from the IMF suggests encouraging companies to hire more women as full-time, rather than temporary, employees, and allowing them greater flexibility in working hours. But the one policy that would help most — opening the country to more immigration — remains so sensitive that no candidate is likely to touch it.

Then there’s the challenge posed by China’s rise. Korean companies have long had an edge over their Chinese rivals due to better technology and branding. But China is quickly catching up, and its companies have been gaining market share in key sectors, such as mobile phones and flat-panel TVs. That means Korean companies will have to become even more innovative and market-savvy to stay ahead — no easy task. Reforming the country’s exam-obsessed education system to allow for more creative thinking and specialisation would be a start. Mr Ahn has made education reform part of his campaign, but bringing major change to the entrenched school system and the success-crazed culture behind it would probably prove difficult.

The best chance for change is likely on corporate reform. Promises to whittle down the power of Korea’s big family-run business groups, called chaebol, have been made, and broken, by politicians many times. But the scandal that toppled the previous president, Park Geun-hye — who was impeached and indicted on corruption charges — has made reining in the chaebol a near necessity for the next president.

Both top candidates have pledged action. Mr Moon has vowed to sharpen the teeth of the national business regulator, halt the regular pardons of corrupt corporate leaders, and force a restructuring of the chaebol ownership and governance system. Such measures could professionalise management and give smaller firms a better chance to compete. But they don’t add up to the sort of radical reform that would shake the cosy ties between government and business. Actually breaking the chaebol up, for instance, would foster competition, productivity and innovation. Yet neither candidate is willing to go that far.

All this has left some economists doubtful about Korea’s prospects. “The medium-term outlook will depend on any progress the new president and his administration is able to make in pushing through key reforms aimed at tackling the country’s mounting structural problems,” argued the research firm Capital Economics in a May report. “But we are not holding our breath.”

Those problems will reverberate well beyond South Korea. In a neighbourhood where China is increasingly flexing its economic and military muscles, Korea is one of the few nations with the will, strength and influence to act as a bulwark for democratic ideals and the rule of law. Seoul has managed just that in recent months, as China has intensified pressure to dissuade Korea from deploying a US missile-defence system. The stronger South Korea’s economy, the better it can withstand that kind of pressure — and the better off the whole region will be.

Michael Schuman is a journalist based in Beijing and author of ‘Confucius: And the World He Created’.