Originally published in the May issue of Value Chain.
The recent special election in South Korea resulted in a convincing win for the candidate of the Democratic Party of Korea, Mr. Moon Jae In. He was elected on 9 May and sworn in on 10 May for a five year term. During the election Moon addressed both national security and economic issues and both issues are highly relevant for the business community in Korea. On the national security side Moon stressed in his campaign that he is open to holding talks with the North Korean leadership in a bid to turn the regime there away from its focus on developing nuclear weapons and resetting its objectives to a new focus on economic development that should eventually lead to the reunification of North and South Korea. Moon also said that he would like to be the sort of Korean leader ‘who can say ‘no’ to the USA’, and the implication here was that he might well be open to rejecting the leadership of the US on issues such as the missile defense of South Korea that uses the US anti-ballistic missile system known as THAAD.
The initial THAAD system was introduced into the southern part of South Korea during the recent election campaign by the acting president, Mr. Hwang Kyo An, who was the last prime minister under the former president Park Geun Hye, who rejected talks with the North and was a supporter of installing the THAAD system in South Korea. Moon accepted Hwang’s resignation and then appointed the governor of South Jeolla Province, Mr. Lee Nak Yon but Mr. Lee will not be able to take office until he is confirmed by the Korean National Assembly (other ministers of government can be appointed directly by the president, but the prime minister must be confirmed by a vote of the National Assembly) in the next few weeks. As of now, the week after the election, Moon has yet to dismiss any of the ministers who were in office when Park was president, but he is expected to announce the names of his appointees soon and then the National Assembly will have the right to hold committee hearings to question the appointees prior to the time when they are appointed by the president. In practical terms that may mean that some or nearly all of the previous ministers may remain in office for anything from a few more days to a few more weeks.
Once Moon has assembled his administration and all of his appointees have taken office at the various ministries, he will then look to making moves that may upset some traditional allies such as the USA, while making others such as China more pleased. On the defense side Moon said repeatedly during the election campaign that if he were elected then he would look at the THAAD system carefully, while his major opponents from the Liberty Korea Party and the People’s Party both accepted the argument advanced by the USA that having the THAAD system deployed in South Korea makes the country safer in light of the increasing threat perceived by the on-going development of nuclear weapons and missile delivery systems in the North. That does not mean that he will ask the American government to remove the THAAD system, but that is an option open to Moon and if he did do so then it would be a popular decision with many of Moon’s followers as well as with the governments of China and Russia.
The Chinese have said repeatedly that they view the THAAD and its radar system as an unnecessary intrusion into their defensive posture, and the Russians have opposed THAAD on similar grounds. But only the Chinese have taken steps to cause problems in China for major Korean chaebol companies such as Hyundai Motors and Lotte group, the Korean retail leader in China. Now that the North has gone ahead with yet another long range missile test just a few days after Moon took office, an action which touched off a critical rebuke of the North’s government by Moon, it remains to be seen whether the Moon administration will continue to exercise patience and offer talks to the North’s leadership, or whether it will join the chorus of other countries calling for more sanctions against the North.
Moon has some carrots to offer if the North’s leadership does want to have the Kaesong Industrial Zone reopened in the North. This is an industrial production zone just north of Seoul but inside North Korea’s southern border near the town of Kaesong, where South Korean managers supervised the work of about 50,000 North Korean production workers at plants set up by the South Koreans. The South Koreans were told to evacuate the facility by Park’s government a couple of years ago, and since then no production has taken place there. While it was in operation the North Korean workers were paid in local North Korean currency while the North Korean government accepted the wage payments from the Southern companies in hard currencies such as Euro dollars or yen. This was a considerable benefit to the North’s government as the foreign currency could be readily used by North Korean officials to buy foreign products for their own use or for their government’s use. Shutting down the zone was one way of cutting off the North’s access to foreign exchange as part of a more general program of sanctions. Whether Moon finds it advisable to reopen production and thus offer a monetary carrot to the North’s leadership is a major question as a reopening may not be possible under current UN sanctions against the North.
The new Moon government also has some major economic goals that will have a considerable influence upon the business climate in Korea, and in particular to the major conglomerates, the chaebol groups, as well as upon foreign business. One of Moon’s campaign pledges was the commitment that if elected, he would add 810,000 new workers to the workforce of the Korean government. This staggering addition to the current level of government employment of perhaps half a million with another 300,000 employed by local governments in South Korea. To employ that many in government jobs would require a huge increase in the South Korean budget and that in turn would have to be approved by the South Korean National Assembly where Moon’s Democratic Party does not have a majority.
Aside from the increase in government employees, the other economic pledges made by Moon during his campaign involve the chaebol and the business community in general. He said that he would increase the authority of the Fair Trade Commission to counter unfair business practices of the chaebol and also to enhance the audit powers of the FTC, which is the entity in South Korea that has brought most of the criminal and civil charges of recent years against various chaebol groups. Moon also said that he wants to reform employment practices at the chaebol to curb their ability to take advantage of workers on temporary contracts and as well he indicated that he would like to see a system where chaebol were forced to be more fair in their contracts with small companies that have traditionally been suppliers to the chaebol. The objective in the latter case would be to reduce the discrepancy in pay rates between the major chaebol companies and subcontractors. Aside from these goals, Moon is also expected to look at taxes, both personal and corporate in a bid to lessen the growing disparities in income between the wealthy in Korea and the lower income levels.
Most of Moon’s goals will involve working with the opposition parties to be achievable and that will take some doing since his party would be heavily reliant upon the cooperation of one or two of the opposition parties to put Moon’s ideas into law. That means of course that there will be time for local and foreign business leaders to register approval or disapproval of Moon’s plans on a case by case basis. Major changes may be coming to Korea, but they will take time to be put into effect if indeed they are approved by the National Assembly.
Hank Morris is an Adviser at Argentarius Group, Member, Executive Board at Seoul Financial Forum and Director at IRC Limited.