South Korea Government Profile 2012

POLITICAL STABILITY

The outlook for the president, Lee Myung-bak, and his ruling Grand National Party (GNP) remains mixed. Lee Myung-bak can take a certain amount of credit for South Korea’s ongoing economic recovery. However, another downturn in the domestic economy would result in higher unemployment and would undermine his popularity.
Some voters have also blamed Lee Myung-bak’s hawkish stance towards North Korea for exacerbating the sharply higher bilateral tensions that have been evident since 2010. His five-year term as president ends in February 2013, while the next election for the National Assembly (parliament) is due sooner, in April 2012. The GNP holds 169 parliamentary seats out of 299. Although in theory this majority should give the president the means to enact legislation, in practice divisions within the GNP mean that he cannot take his party’s full support for granted. That the party won only one of the four parliamentary by-elections that were held on April 27th is a further blow: with a general election less than a year away and the next presidential contest due in December 2012, Lee Myung-bak’s challenge is to avoid becoming a lame duck as attention shifts to the race to succeed him.

ELECTION WATCH

Lee Myung-bak is likely to complete his presidential term and step down in February 2013, two months after his successor has been elected. Unless the timing of the presidential and parliamentary elections is altered so that they become synchronised (a possibility that is under discussion but which may not come to fruition), Lee Myung-bak’s final ten months in power will require him to work with the new parliament that is to be elected in April 2012. The buildup to the two national elections, and especially the presidential poll, will dominate politics in 2011-12. The GNP’s parliamentary majority will remain safe until 2012 provided that the party holds together. If Lee Myung-bak manages to attract greater voter support, the GNP may be able to keep control of parliament at the election. Even if he remains unpopular, the party could retain its majority if it finds a new presidential candidate who pledges a fresh start.

POLICY TRENDS

The government will pursue business-friendly policies in 2011-15. However, there are concerns that Lee Myung-bak may continue to face obstruction in parliament when attempting to legislate. The South Korean economy is heavily dependent on external trade, and the authorities will therefore also implement policies (including modest capital controls) that aim to prevent the won from rising too sharply in the international foreign-exchange market. Now that the domestic economy appears to have stabilised, the authorities are gradually shifting their attention to structural issues. The Financial Services Commission (South Korea’s main financial regulator) has announced a series of measures to shore up the beleaguered community-bank sector (consisting of small banks  catering largely to local communities). The government will nevertheless be cautious about reversing its stimulus measures. The authorities will seek new sources of economic growth in the forecast period in an effort to fend off Chinese competition. As part of this push, officials will pursue policies aimed at attracting foreign direct investment. Having ratified a landmark free-trade agreement with the EU in July 2011, the government will seek to conclude further free-trade deals with South Korea’s largest trading partners.