South Korea has been considered a key ally for Western governments in an often tense Eastern Asian region, and it's set to hold elections this year in which voters may take the opportunity to break with policy trends in place over past decades.
Voters in the country will decide on whether the government should take a more conciliatory stance with its renegade neighbor, North Korea; and whether the country should ease ties with key Western trade partners to look more permanently toward narrower ties with China and other East Asian partners.
The South Korean Economy
The South Korean economy has grown from an underdeveloped economy following WWII into a leading industrial economy in Asia. Part of the success of the nation's economic transformation was due to significant economic aid received from Western nations and development agencies following WWII.
As of 2017, South Korea has the world's 14th-largest economy, with a GDP of US$1.4 trillion. Its top industries include electronics, telecommunications, automobile production, chemicals, shipbuilding and steelmaking, and the nation's unemployment rate sits at around 4%.
South Korea's Government And Elections
South Korea, which is officially known as the Republic of Korea, has a democratically elected presidentialist system of government with three branches: the executive branch, the national assembly and the judiciary branch. The country also has local governments responsible for municipal and regional administration.
The nation holds presidential elections every five years, and citizens ages 20 and older are eligible to vote. The president holds a single five-year term and is not eligible to hold office for additional terms. The nation's executive branch is made up of the president and 15 to 30 cabinet posts. The president also appoints a prime minister, who takes over the role of president if the president resigns, dies in office or is impeached.
South Korea's National Assembly is composed of 299 members who serve four-year terms. Every four years, 243 members are elected by popular vote and the remaining 56 seats are assigned to each political party that has obtained 3% or more of all valid votes.
The responsibilities of the National Assembly include the following:
- deliberation and approval of the annual budget,
- auditing the government administration,
- deliberating on matters related to foreign affairs,
- declarations of war,
- determination of the use of armed forces abroad
- and impeachment.
South Korea's judiciary branch is composed of the Supreme Court, appellate courts, district courts and family courts, among others. The Chief Justice of the Supreme Court is appointed by the president with the approval of the National Assembly, while other justices are appointed by the president upon the recommendation of the chief justice. The term for all justices on the high court is six years.
South Korean Trade And Economic Relations With The World
In 2016, South Korea ran a foreign trade surplus of close to US$90 billion, with US$495 billion in exports and US$406 billion in imports.
The country's top exports include integrated circuits, refined petroleum, automobiles, passenger and cargo ships, and liquid crystal devices. Its top imports include crude oil, gas, integrated circuits, refined petroleum and coal. South Korea's top trade partners are China, the U.S., Japan, Saudi Arabia, Hong Kong, Qatar and Singapore.
What Is At Stake In The 2017 Election?
Since the end of their direct military conflict, South Korea's relations with its northern neighbor have been a central matter of its domestic politics.
At the end of WWII, the Korean peninsula was divided by the prevailing world powers into two countries: North Korea, which became allied with communist Soviet Union and China; and South Korea, which became allied with the U.S. and the free market nations in Western Europe and elsewhere.
North Korea, a closed and secretive state run by an authoritarian family dynasty, remained a protectorate of the Soviet Union until the latter's collapse in the 1980s. Since then—under the rule of Kim Il-sung, Kim Jong-il and Kim Jong-un—the country has fortified and increasingly militarised itself in reinforcement against possible military conflict with neighboring countries and Western powers.
Under the rule of Kim-Jong-il, who took office in 1994, the country began development of a nuclear weapons program, which it began testing in 2006. This has gained the attention of world leaders, and forced the South Korean government into deciding how to help defuse a tense situation on their border while mediating regional interests that involve China, Japan, Russia and the U.S.
South Korea's Family-Owned Industrial Conglomerates (Chaebols)
A significant portion of South Korea's economy is driven by the country's "chaebols," also known as family-controlled industrial conglomerates. Companies that fall into this category include internationally recognised Korean brands such as Hyundai, Samsung and LG. The companies, which were built through government incentives beginning in the 1960s, have come under criticism for their close ties and dependence on government, in addition to their suppression of local competition.
China, The Far East And U.S. Relations
Despite South Korea's success as a capitalist tiger in East Asia, geopolitical concerns may potentially act as a weight on the country's growth prospects ahead. In particular, China has expressed dissatisfaction with South Korea's proposed security arrangements with the U.S.
One such contentious issue is South Korea's proposal to allow deployment of the U.S. THAAD ballistic missile shield as a deterrent against the threat of potential North Korean military aggression. China has complained that deployment of the system could undermine its own nuclear deterrent and penetrate its defenses with the shield's radar system.
With the intention of dissuading South Korea from authorising deployment of the THAAD system, China (its largest trading partner) has threatened to restrict commercial relations and tourism with the country. The impact could be damaging for South Korea's economy, which sells US$142 billion in exports to China annually—around double the amount South Korea sells to the U.S.
In addition to military policy, the next South Korean president may be forced to make significant choices about trade policy. U.S. President Donald Trump's decision to reject his nation's participation in the Trans-Pacific Partnership—a proposed trade deal among 12 Pacific-region nations—China has been promoting its own alternative agreement.
China's proposed Regional Comprehensive Economic Partnership (RCEP) would include all the Asean (the Association of Southeast Asian Nations) region countries in addition to Australia, New Zealand, Japan, Korea and India. But it would exclude the U.S.
The agreement would cover almost one-third of the world's GDP and almost half of the world's population. A strategy of striking closer ties to China may carry risks though, as China's economy has shown signs of slowing, and may be hit hard by a growing sentiment of protectionism in the U.S. and elsewhere in the West.
Scandal And Talks Of Impeachment
In December 2016, South Korea's National Assembly voted for impeachment proceedings against President Park Geun-hye. The daughter of former South Korean President Park Chung-hee, she was elected as the country's 11th president (and first female president) in December 2012.
During her time in office, Park was accused of allowing a friend and non-government employee, Choi Soon-sil, to gain access to government documents and run an influence peddling scheme with private sector entities using her government connections. The scheme was far-reaching within the private sector, reportedly even involving executives from Korea's multinational Samsung corporation.
In parliamentary elections held in April 2016, Park's Saenuri Party lost the small majority it held, taking only 122 seats versus the 123 gained by the opposing Minjoo Party. The defeat was attributed to growing voter discontent with the country's economy, measures adopted by the government that reduced worker job security, and crackdowns on protests against the government.
Moon Jae-in is a leader of the opposition Minjoo Party. He is a former student activist who was jailed in the 1970s for his political activities during the regime of President Park Chung-hee.
More recently, Moon lost by a narrow margin to Park Geun-hye in the country's 2012 election. As part of his platform, he has emphasized economic policy that boosts incomes in order to raise economic growth rates, a foreign relations stance that favours independence from major global powers and efforts to resume talks and improve relations with North Korea.
Rhee In-je is a veteran lawmaker from the governing Saenuri Party, and is set to make his fourth run for the presidency since 1997. He is running on a platform to reform governmental powers and the country's model for family-owned conglomerates and fair business practices. As a member of Park's party, however, Rhee faced a difficult campaign because of the party's dwindling popularity prompted by the aforementioned corruption scandal.
Ahn Cheol-soo is the wealthy founder of a Korean software development company and the leader of a small opposition party, the People's Party. He has campaigned on a platform of "rational reform," which is aimed at minimising political disputes, allocating resources more efficiently and taking measures to improve social welfare. Ahn has suggested that tax increases may be necessary to meet those goals.
A leader of the liberal Minjoo Party, Lee Jae-myung is the incumbent mayor of Seongnam, a city near Seoul. He was an early critic of the Park Geun-hye administration, and has campaigned on a platform of reforming rules for family-owned business conglomerates that are frequently caught up in corruption cases.
The mayor of Seoul, Park Won-soon gained a favourable reputation as a human rights lawyer when he fought for the rights of Korea's "comfort women" who were used as sex slaves during World War II. He is a member of the Minjoo Party, and has come out in favour of reform of the business sector and greater incentives for investment. Park has also favoured continued reconciliation efforts with North Korea. These would include resuming large joint industrial investment and tourism projects with the neighbor to the north.
The governor of the Chungcheong province, Ahn Hee-Jung of the Minjoo Party has also declared his candidacy. He has labeled himself as the representative of the opposition with the best chance to win the election, and has called for a smooth reform of the chaebol system and efforts to improve job creation.
Acting President Hwang Kyo-ahn, of the ruling Saenuri Party, is has seen entered the race as a staunch defender of the positions of impeached President Park. But like other contenders from within the Saenuri Party, he may be hampered by the party's association with the ongoing scandal in Park's government.
Will There Be An Early Election?
While South Korea's next presidential election is officially scheduled for December 2017, the country may hold its elections earlier than scheduled because of the aforementioned impeachment talks. In the case of an impeachment, Korea's constitutional court must decide on whether to ratify the motion within a period of six months. If ratified, a new election must be held within a period of 60 days, meaning the election could happen as early as June.
Impact On The Korean Won
South Korea has customarily promoted a weak currency policy in an effort to help promote its export-based economy. Its currency, the won, had gained some strength against the dollar early in 2016, but weakened late in the year amid market bets on possible interest rate hikes in the U.S. and a return of investors seeking rising yields in U.S. treasuries. The prospects for the won have also been thrown into doubt by a slowing economy in China and the possibility that Korea's exports to that country could decrease.
South Korea's upcoming 2017 presidential elections promise to bring significant bearing on whether the nation will alter its diplomatic stance, adopting a more conciliatory posture in relation to North Korea. There is also the potential for South Korea shifting its trade relations more permanently away from Western allies like the U.S. toward China and an axis of Asian partners.
The vote could therefore be significant for Asian regional politics in addition to the U.S. and Western markets, which have come to rely heavily on South Korea as a stable ally and industrial supplier in Asia.
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Senior Market Specialist
Russell Shor (MSTA, CFTe, MFTA) is a Senior Market Specialist at FXCM. He joined the firm in October 2017 and has an Honours Degree in Economics from the University of South Africa and holds the coveted Certified Financial Technician and Master of Financial Technical Analysis qualifications from the International Federation…