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Hundreds of yellow ribbons still flutter in the square outside Seoul’s city hall, commemorating the sinking of the Sewol ferry in April – a disaster that sparked national soul-searching about the corruption and systemic failures that still dog one of Asia’s strongest economies.
Grief at the incident’s presumed toll of 304 lives, mostly schoolchildren, was strong enough to drag down national consumption in the second quarter of the year, the Bank of Korea said. Sorrow was soon joined by anger, as details emerged of regulatory laxness that allowed the vessel’s operator to flout safety standards, and a disjointed rescue effort that may have resulted in needless loss of life.
For some South Koreans, the disaster raised deep questions over an economic “miracle” that catapulted the country from one of the world’s poorest to the tenth-biggest trading nation in just half a century.
“Let’s give up the title of ‘developed country’ for now,” wrote a columnist in the Joongang Ilbo daily newspaper. “No matter how big the Korean economy has become, we cannot confidently say Korea is a developed country when the lives of its citizens are not guaranteed.”
Outrage over the incident has added to the challenges of Park Geun-hye, president since February last year, who has struggled to overhaul an economic model that is widely perceived to be running out of steam.
Ms Park was elected after promising greater support for society’s most vulnerable, and a more dynamic economy with greater scope for smaller businesses to grow. The former pledge was scaled back last year, as Ms Park reduced the extent of promised expansions to health and welfare benefits, citing disappointing tax revenues and economic growth.
Despite such embarrassments, and fierce criticism of the government over the Sewol disaster, opinion polls show Ms Park has retained greater popularity than predecessors at the same point in their terms.
“Her biggest achievement is perhaps her approval rating,” says Kim Ji-yoon, an analyst at the Asan Institute. She notes, however, that Ms Park’s support is far weaker among young people than among those who remember her father Park Chung-hee, the military dictator who oversaw rapid economic development from 1961 to 1979.
Projected growth rate this year, robust by most advanced country standards but much weaker than South Korea’s pre-crisis levels
Ms Park shares her father’s focus on growth, having gone quiet on talk of “economic democratisation” heard during her 2012 election campaign. This priority has been underscored since the July appointment as finance minister of Choi Kyung-hwan, whose energetic policy making has been dubbed “Choinomics” by local media.
South Korea’s economy is set to grow by 3.5 per cent this year, according to the central bank – robust by the standards of most advanced countries, but low enough to spark concern in a country that enjoyed far higher growth for several decades until the global crisis of 2008.
The government’s new economic policy has focused in part on boosting the housing market by easing regulations on mortgage loans. It appears to have had an impact: home prices ticked up in the third quarter of this year, reversing a prior decline, with the number of transactions leaping by two-thirds from a year before.
The mortgage reforms raised eyebrows among those who view South Korea’s high household debt, at around 160 per cent of household income, as one of the country’s economic weak points.
Growth in household debt has been further supported by the central bank’s interest rate cuts in August and October, producing a potentially counterproductive policy mix, according to Duncan Wooldridge, an economist at UBS.
“The new policies . . . encourage household credit to grow much faster than income,” Mr Wooldridge said in a recent note to clients. “There may be a short-term gain for the economy, but we expect any benefits to quickly fade,” he said, warning that policy makers are “misjudging the sustainable pace of growth”.
Mr Choi also announced a $40bn stimulus plan in July, followed by a promise of a 5.7 per cent increase in government spending next year. This expansionary policy is set to swell the budget deficit next year, with nominal government debt set to grow by a cumulative 31.2 per cent over the next four years to 2018, much faster than the projected pace of economic growth.
A growing debt pile will not help future efforts to deal with what will soon become one of the world’s most rapidly ageing populations. Yet with government debt at just over a third of gross domestic product, and a current account surplus of $39bn in the first half of this year, bond investors view South Korea as a far safer bet than was the case a decade ago.
In contrast, South Korean equities remain significantly cheaper than those in other major markets, largely because of the exceptionally low dividends paid out by listed companies. Some investors hoped this would change after Mr Choi in August unveiled new tax measures aimed at pushing companies to dispense with excess cash.
There was a blow to such expectations in September when Hyundai Motor, Kia Motors and Hyundai Mobis announced a joint plan to spend $10bn on land for a new headquarters in Seoul. News of the deal immediately wiped $8bn from the value of the three companies, and contributed to a broader sell-off of South Korean stocks, as investors focused on the risks posed by the family-dominated structure of the country’s chaebol business groups.
Ms Park has responded to such concerns by putting the stimulation of small, innovative businesses at the centre of her policy agenda. The state-backed Growth Ladder Fund has already invested Won259bn ($237m) in 52 companies, and plans to spend a further Won6tn over the next few years.
The wave of state support has been controversial in the start-up sector: some entrepreneurs say it will help tackle longstanding funding problems, while others warn it could distort the markets and encourage some start-ups to chase subsidies instead of profit.
Another of Ms Park’s main policy planks – a push for reunification with North Korea, launched in a January speech in Dresden – faces similar scepticism. Almost three years after he took power in Pyongyang, Kim Jong Un’s position appears secure, despite a five-week absence this autumn apparently caused by health problems.
North Korean officials and state media stress the country’s determination to develop, and some analysts perceive signs of tentative economic reform, in part driven by the influence of well-established private markets. But Pyongyang remains publicly determined to push ahead with its nuclear programme, and a handful of high-level inter-Korean meetings this year made little progress towards a deepening of relations. As Koreans prepare to mark the 70th anniversary of their nation’s partition, few are anticipating an end to their division in the near future.
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