Korea Special December 2016

Korea

Korea: President Park Geun-hye is impeached, ensuing political uncertainty has economic ramifications

December 9, 2016

On 9 December, the National Assembly of Korea voted overwhelmingly in favor of impeaching President Park Geun-hye, who is implicated in an influence-peddling scandal that has rocked the country’s political arena since it erupted in October. The scandal has derailed Park’s flagship structural reforms and threatens to cause consumer confidence to plunge amid a public outcry for better corporate governance in Korea’s family-run corporations, known as chaebols. The favorable votes of 234 out of 300 lawmakers to impeach Park prompted the immediate revocation of her executive powers and the transferal of these to Prime Minister Hwang Kyo-ahn. However, Park has so far dismissed calls for her resignation, hinting instead that she will wait until the constitutional court rules on the motion, a process that could take up to six months. If the court upholds the impeachment, a presidential election would be held within 60 days.

Park’s refusal to immediately resign will not help Korea’s battered economy, which is plagued by faltering industries, highly indebted households and dwindling export volumes. The ensuing political uncertainty will continue to weigh on consumer sentiment, which already sits at a seven-year low, as well as on investor confidence. Policy decision-making will also stall in relation to key reforms that Park’s administration had undertaken, particularly those linked to efforts to liberalize the job market and boost the country’s competitiveness.

Overall, however, the downside risks to economic policy-making are limited. On 2 December, the National Assembly approved the 2017 budget bill after government and opposition parties resolved their differences on some of the most pressing issues, including a free child care program. The budget is conservative and only foresees a modest increase in spending, but the mere fact that it was passed suggests that some degree of policy decision-making will continue, regardless of the political instability.

In addition, the scandal could serve as a catalyst to improve transparency and good governance in Korean business and political culture, more specifically between chaebols and government authorities. Chaebols are the core of the economy, but their close ties with the political establishment and its lack of accountability and transparency have often sparked protests. On the feasibility of such changes, Young Sun Kwon, research analyst at Nomura, comments:

“One silver lining is that Korea now has a much stronger external balance and better macroeconomic policy framework than before, which should increase the likelihood of successful reforms if a good governance system is established.”

Although the economic effects of Park’s fall from grace will be limited in the near-term, a political vacuum until mid-2017 and increased political wrangling risk aggravating the policy standstill. In the longer term, the outlook is more complicated. On the one hand, the risk of further public outrage remains high and could continue to weigh on confidence. On the other hand, positive spillovers from increasing corporate accountability or a new, more stable government could help shore up economic growth. Since the scandal broke out in October, FocusEconomics panelists have reassessed the prospects for growth and now expect the Korean economy to expand 2.5% in 2017, which is down 0.1 percentage points from last month’s forecast.


Author:, Economist

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