Yoon’s martial law stunt may cost Korea a lost decade
South Korea’s economic prospects were already dim with Trump tariffs to come and Yoon’s failed power grab has only made matters worse
In the space of six hours, President Yoon Suk Yeol set his economy back ten years and raised the odds the next decade will be a lost one for South Korea.
The focus at the moment is parliament’s call for Yoon’s resignation and impeachment for his bizarre martial law declaration late Tuesday (December 3). Once the dust settles, though, the real collateral damage will be to Asia’s fourth-biggest economy.
On Monday, the day before Yoon’s desperate stunt, South Korea was already carrying serious preexisting conditions into a 2025 many Seoul policymakers dread. Between China’s slowdown and Donald Trump’s coming trade war, South Korea’s economy will find itself in harm’s way early and often.
Complicating the way forward is record household debt that’s undermining consumer spending. South Korea also suffers from weak productivity and a gender pay gap that impedes innovation.
Korea’s fertility rate is the lowest anywhere. A handful of family-owned conglomerates, or chaebols, continue to dominate the economy, making it hard for start-ups to thrive and disrupt the country’s export-driven growth model.
And the financial system needs major reforms to end the “Korea discount” that undervalues Kospi index valuations.
Trouble is, Yoon’s antics just proved investors doubting Korea’s readiness for global primetime right. Even if Yoon can avoid being impeached — a big “if” — his government is now even more in the lame-duck zone than it was three days ago.
“It’s hard to see how Yoon survives this unless there’s some sort of other shoe to drop that we don’t know about yet,” says Eurasia Group analyst Jeremy Chan.
One reason for Yoon’s martial law ploy, as best as we know, was frustration with opposition parties that are stymieing his agenda. Yet Yoon greatly compounded the problem. Expect all-out gridlock now.
The Bank of Korea seemed to realize this new normal in Seoul politics. Right after Yoon declared martial law, BOK Governor Rhee Chang-yong pledged “unlimited liquidity” to tame markets. He called an emergency meeting on Wednesday to consider how the BOK can shield the economy from additional political antics to come.
“From a near-term policy standpoint, apart from the market disruptions, uncertainty could also arise in the event of cabinet changes,” says Goldman Sachs analyst Goohoon Kwon. On Thursday, Defense Minister Kim Yong-hyun resigned.
In the best-case scenario, argue Citigroup economists, “the negative impact to the economy and financial market could be short-lived as uncertainties on the political and economic environment could be quickly mitigated on the back of proactive policy response.”
Yet economist Anushka Shah at Moody’s Ratings adds that a “prolonged period of political conflict that impacts economic activity and leads to work stoppages would be credit negative.”
A key flashpoint is the value of the Korean won, both for domestic politics and the external sector. “The domestic political turmoil will aggravate the bearish sentiment swirling around the Korean won, though the growth slowdown and likely US-China trade war next year will continue to be the bigger driver,” says Alvin Tan, currency strategist at RBC Capital Markets.
A wiser leader than Yoon might have looked at his sub-20% approval rating and tweaked policies accordingly. Or devise new ones that might appeal to opposition parties and voters. Instead, Yoon threw a tantrum, leaving many of Korea’s 51 million people wondering if Yoon’s support rate is way too high.
Yoon also injected a dose of Trumpian paranoia by warning of “anti-state” forces sympathetic to North Korea conspiring against him. Not a wise move by a leader who makes US President Joe Biden and Japanese Prime Minister Shigeru Ishiba look almost popular at this point.
This was “an act of political desperation,” Chan says. “It wasn’t about North Korea or social order — despite Yoon’s claims.” Ultimately, Chan adds, Yoon was “trying to send a message to the National Assembly and bringing all legislative proceedings to a halt.”
The problem is that South Korea’s government functions are seizing up at arguably the worst possible moment. Along with China exporting deflation, Seoul is bracing for US President-elect Trump’s coming tariffs. The 60% levies Trump has threatened for China could be just the first leg of a tariff arms race.
Trump has telegraphed 100% taxes on automobiles made in Mexico. Car-making giants in Korea and Japan worry — for valid reasons — that they’re next.
Concerned about the fates of Hyundai, Kia and others, Yoon has been scrambling for a meeting with Trump. Yoon dusted off his golf clubs for the first time in eight years in hopes for a Mar-a-Lago tee-time.
Yoon’s government even hired the lobbying company at which incoming White House chief of staff Susie Wiles worked. According to Korean media, Korea’s Washington embassy tapped Mercury Public Affairs to build bridges to the next White House.
Trump, of course, is less of a bridge-builder than a geopolitical wrecking ball. Still, Yoon has studied up on former Japanese Prime Minister Shinzo Abe’s Trump bromance.
In November 2016, Abe was the first world leader to dash to Trump Tower in New York to kiss the ring. Along with generating global headlines, the stunt bought Abe a seat next to Trump at Group of Seven meetings and other global confabs.
If Yoon looked closer, he’d see how little the late Abe got in return for his subservience. Trump ignored Abe’s pleas and still abandoned the Trans-Pacific Partnership trade pact, a cornerstone of Japan’s effort to contain China.
Abe’s acquiescence didn’t earn Tokyo a pass on the Trump 1.0 trade war. It didn’t stop Trump from trying to shake down Abe for US$8 billion of annual payments to maintain American troop levels in Japan. It didn’t stop Trump from palling around with Kim Jong Un, legitimizing North Korea’s murderous regime at the expense of Japan’s national security.
Yet Trump 2.0 is just one of South Korea’s biggest economic challenges. The other is how its preexisting conditions are driving the economy off course.
The first half of Yoon’s five-year term did little to raise Korea’s economic game. He’s done little, if anything, to level playing fields to help small-and-medium-sized companies grow into larger ones.
He’s made no discernible headway toward reducing crushing household debt levels, increasing worker efficiency, empowering women and raising average income.
Nor has Yoon managed to assuage MSCI’s misgivings about Korea Inc. Earlier this year, Yoon made a uniquely assertive case for the global index giant to upgrade South Korea to developed-nation status, a designation that would lure tidal waves of global capital into won-denominated assets.
Back in March, Yoon pledged to scrap outdated regulations, loosen limits on corporate ownership, strengthen capital markets, increase currency-trading hours, boost transparency and even tolerate short sellers.
MSCI went away unimpressed. As its analysts said in June: “Once in effect, these efforts will be subject to consultation with market participants to assess their impact and effectiveness.” In other words, Team Yoon should stop talking about a supply-side Big Bang and execute it.
Sadly, Yoon is but the latest Korean leader to talk a great game of financial upgrades and do little. Like his five predecessors over the last 20 years, Yoon quickly realized the difficulty and risk of clashing with Korea’s chaebol-industrial complex and demurred.
This chronic complacency comes at a high price. In any tally of major economies courting a Japan-like lost decade through complacency and political distraction, South Korea deserves a primary place. Yoon, part of this sad continuum, also let the BOK run the show.
So did Moon Jae-in, who was elected in 2017 to restore faith in the Korean economy. Moon began with a bold plan to champion “trickle-up economics.” It included higher corporate taxes to better distribute wealth and job opportunities.
Moon’s emphasis on enriching the middle class was the flipside of the strategies championed by Abe, Trump and Ronald Reagan and Margaret Thatcher decades before. Yet Moon, too, saw the magnitude of the task of taming Korea Inc — and he backed off.
The same was true for Park Geun-hye, president from 2013 to 2017. Not only was she Korea’s first female president, but also the daughter of former national leader Park Chung-hee, who built the chaebol-led model that still dominates today back in the 1960s and 1970s.
Park Geun-hye took office with grand plans to dismantle her father’s economic system. She talked of devising a more “creative” model of entrepreneurship and shifting tax incentives toward startups.
Park planned, too, to strengthen antitrust enforcement and penalize big companies for hoarding profits that could be used to boost paychecks and fund new cutting-edge research and development.
At the heart of her father’s export-led development scheme was prioritizing preferential loans to outward-facing businesses and insulating domestic industries from global competition. The strategy borrowed from the “Asian tigers” playbook Japan had written.
Of course, Park Chung-hee’s legacy is back in the news this week. The turmoil that erupted around the time of his 1979 assassination coincided with a previous martial law declaration.
Over time, Korean officialdom was captured by the home-growth giants Park Chung-hee’s policies created. But once daughter Park Geun-hye settled into the presidential Blue House, 38 years after her father’s assassination, she too decided change was too difficult and risky.
Rather than upending the chaebol system, Park got co-opted. By 2017, she was impeached and jailed in a scandal involving Samsung leader Lee Jae-yong. Both have since been pardoned, much to the dismay of many Korean voters.
Before Park, Lee Myung-bak, president from 2008 to 2013, pledged to generate more economic energy from the ground up. Voters hoped that, as a former CEO of Hyundai Engineering and Construction, Lee had the know-how to shift growth engines away from exports toward domestic demand. Lee demurred, siding with the chaebols that produced him.
If only any of these leaders had put big reform winds on the scoreboard, Korea might not today be struggling to raise incomes and compete in the age of China. Even if Yoon manages to cling to power, somehow, his odds of elevating the economy to greater heights in the 887 days he’d have left in office are slight, at best.
What Yoon has done is put South Korea in the orbit of Asia martial-law enforcers in ways that global investors won’t appreciate. These include Indonesia, Myanmar, the Philippines, Thailand – and now South Korea.
Along with proving markets right about the Korean discount, Yoon reminded them of a past that Kospi investors would rather not contemplate, including martial law episodes dating back to 1948.
One silver lining: “The swift reversal of the martial law underscores the resilience of South Korea’s institutions,” write analysts at BMI, a Fitch Solutions Company.
For now, BNI argues, “we expect limited implications for the economy and financial markets as the Bank of Korea and the Ministry of Finance have responded swiftly by reassuring investors. Notably, the central bank committed to boosting short-term liquidity and enacting measures to stabilize the FX markets, which aligns with our view that risks around the South Korean won should remain contained for now.”
Perhaps, but the fallout from Yoon’s deranged and selfish act could add to worries South Korea will look at a decade from now and wonder where and how all that potential was lost.
Follow William Pesek on X at @WilliamPesek