1) President Moon Jae-in of South Korea faces challenges in implementing his policy agenda due to his party lacking a majority in the National Assembly, forcing cooperation with opposition parties. 2) Moon aims to redistribute spending towards welfare, education, and labor to address unemployment and inequality, but deep-rooted issues around South Korea's large conglomerates and SMEs may inhibit structural reform. 3) Geopolitically, Moon takes a conciliatory approach towards North Korea but is constrained by its nuclear ambitions and sanctions. Strained relations with China following THAAD deployment also impact South Korea economically and geopolitically.

1. Future Watch – Strategy Brief
Written by
Moon shining? Korea’s renewal
and agenda for the future
January 2018

2. Future Watch – Strategy Brief
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3. Future Watch – Strategy Brief
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4. Future Watch – Strategy Brief
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4 Report highlights
A short summary of the main takeaways
5 Introduction
South Korea’s recent developments and challenges ahead
7 Political outlook
Analysis and expectations on South Korea’s domestic political
situation, policy outlook and regional geopolitics
10 Economic outlook
Analysis and forecasts on South Korea’s macroeconomic and labour
market conditions
15 Business outlook
Analysis on trends that affect business and business confidence in
South Korea
Table of
contents

5. Future Watch – Strategy Brief
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- President Moon’s Minjoo Party lacks the 180-seat three-fifths majority
necessary to unilaterally pass legislation in the National Assembly, forcing the
party to cooperate and build consensus on its policies. This difficult
parliamentary dynamic will further slowdown policymaking and add to the
obstructionist force of opposition parties.
- Moon Jae-in’s economic strategy will redistribute public spending into welfare,
labour, and education, tackling rising inequality and unemployment. The rigid
dual system, split between regular and non-regular workers, chaebols and
SMEs, however, has introduced deep-rooted structural issues to South
Korea’s job market.
- Under Moon Jae-in, an advocate for rapprochement and reunification, many
expect to see a recalibration of relations between South and North Korea and
a revival of the sunshine policy. Mr Moon, however, has also increased the
fiscal 2018 defence budget, suggesting his flexible stance on the issue.
- The diversification of South Korea’s export-led growth model vis-à-vis the so-
called fourth industrial revolution paradigm shift will be gradual, meaning that
real GDP growth will remain at the mercy of global trade prospects. GDP
growth will be particularly impacted by China’s economic slowdown in 2018
and a US recession in 2020. Spiralling household debt and interest rate hikes
introduced under the BOK’s new cycle of monetary tightening will also
constrain private consumption growth.
- Moon Jae-in’s ‘people-oriented’ growth model aims to move away from a
reliance on exports towards boosting domestic consumption through
increasing the minimum wage by 55% in 2020. Public spending on research
and development (R&D), alongside investment in innovative SMEs, will further
push Mr Moon’s policy agenda to close wage and productivity gaps between
the conglomerates and SMEs.
- Corporate governance reform, a key policy area for the liberal government, will
be focused on blocking the concentration of economic power monopolised by
the conglomerates and improving governance structures in order to prevent
unfair trade practices.
- With gender inequality restricting many women from actively participating in
the workforce or advancing to executive positions, President Moon intends to
push for funding to train women returning to work after maternity leave and
women wanting to establish start-ups.
- South Korea’s rapidly aging population will become a further drag on the
nation’s GDP growth, requiring increased healthcare expenditure. This will
force the government to increase taxes to achieve fiscal sustainability. The
changing demographic, however, will provide new silver market opportunities
for businesses and drive the shift towards the fourth industrial revolution.
Report
highlights

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On March 10th 2017 former President Park Geun-hye, who took office in 2013, was
impeached over allegations that she abused her position of power to bribe the chaebol,
South Korea’s family-controlled business conglomerates, and allowed her close aide
and confidante, Choi Soon-sil, access to meddle in state affairs. These wide-ranging
corruption scandals roused public anger against Park, and her ruling Saenuri Party,
and abruptly created space within the South Korean political system for a new
contender to fill. Following the snap election in May, Minjoo party candidate, Moon Jae-
in, who had narrowly lost to Park in the 2012 election, emerged as South Korea’s new
center-left wing president willing to take the country in a different direction. The
backlash that developed from Park’s scandals drove a shift away from a decade-long
period of conservatism in the public sphere, deepening ideological and generational
lines of division.i Korea’s ability to swiftly elect a successor in a fair electoral process,
however, is testament to the democratic maturation of the country.
Moon Jae-in’s support base is largely filled by citizens in their 20s, 30s, and 40s, owing
to his liberal policies that aim to tackle unemployment and job-insecurity felt
predominately by Korea’s highly-educated youth. During his campaign, Mr Moon
frequently referred to himself as the “jobs president,” aiming to reform the economy so
as to create more high-quality jobs and combat the exploitation of non-regular workers.
Hailing from a humble farming background, and as a student activist in the protests
against authoritarian leader and impeached Park’s father, Park Chung-hee, Moon Jae-
in identifies with the inequalities experienced by the population at large and their pro-
democratic tendencies. The president’s high approval ratings, which remain hovering
above 70% after eight months in power, confirm his popularity with Korean citizens and
sustained anti-conservative sentiment.
On a more personal note, Moon Jae-in’s parents were North Korean refugees, which
is often cited as one of the reasons for his positive stance on a rapprochement between
the two countries, leading eventually to his desire for reunification.ii During his time as
chief of staff to president Roh Moo-hyun from 2003-2007, Moon was strategically
involved in negotiations promoting the famous “sunshine” policy, which sought to open
a dialogue between North and South Korea through measured engagement and
economic cooperation. Implementing such a policy in the current geopolitical climate,
however, would go against existing UN sanctions imposed upon the rogue state, yet it
is no secret that Mr Moon wishes to rekindle amicable relations with the north, which
would likely be dubbed “moonshine policy.” Maneuvering around economic sanctions,
moreover, has been trumped by the more urgent crisis of North Korea’s rapid
nuclearisation, which has ignited tensions among the North Asian states and curbed
any recent attempts at diplomatic negotiation.
The challenges that the Moon administration faces are not limited to the North’s
nuclearisation. While Moon’s electoral victory in May secured 41% of the vote, the
Minjoo Party lacks the 180-seat three-fifths majority necessary to unilaterally pass
legislation in the National Assembly.iii With 121 seats, Minjoo has been forced to
cooperate and build consensus on its policies with the liberal People’s Party (PP), who
occupy 45 seats out of a total of 300. Despite the relative success of the two parties’
combined representation so far on the 2018 budget negotiations, strained relations
between Minjoo and the PP propose a difficult parliamentary dynamic and are likely to
delay and inhibit future policymaking.
Introduction

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The conservative Liberal Korea Party (formerly the Saenuri Party) with 107 seats,
along with the smaller Bareun Party (which splintered from Saenuri) with 20 seats, will
intensify the constraints of Minjoo’s weak parliamentary majority, further slowing down
legislative processes through acting as an obstructionist force. The Economist
Intelligence Unit, therefore, maintains that the efficiency of policymaking will be
hindered by continued boycotts and bargaining in the South Korean political system
until the next election in April 2020, thus potentially leading to an impasse that could
frustrate citizens and negatively impact Moon’s popularity.iv
South Korea’s economic rise to become one of the Four Asian Tigers is often attributed
to the establishment of its business system dominated by the family-run
conglomerates, chaebol. The core companies of many chaebol are export-oriented
manufacturers, who played a key role in developing new industries and markets in
South Korea, assissting in rapid growth over the past decades. Despite large debts
and countless corruption scandals, the chaebol are often cited as “too big to fail.” Moon
Jae-in’s Minjoo party, however, hopes to reform both this attitude of implicit compliance
within the government and Korea’s export-led growth model.
The fourth industrial revolution in particular continues to guide South Korea’s transition
towards an innovative growth model that invests in promising SMEs and start-ups over
family-controlled conglomerates. Such initiatives equally aim to close the widening gap
between SMEs and chaebol, which has fuelled a problematic labour market
segmentation in South Korea that Moon’s government is desperate to address. This
paradigm shift, moreover, which aims to redirect spending into next-generation
industries, will also work to support South Korea’s rapidly ageing society and poor
labour productivity through promoting automation and technologies that complement
the decline in human capital.

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Domestic outlook
Jobs president: labour reform policy
Moon Jae-in’s economic strategy has
focused on alleviating the pressure of
household debts through raising taxes
on elite corporations in order to
redistribute wealth and create an
economic environment conducive
towards small and medium sized
enterprises (SMEs). Job creation and
welfare benefits will also feed into Moon
Jae-in’s fiscal policy as a way of tackling
rising income inequality and job security
concerns. During Mr Moon’s campaign,
for example, he promised to create
810,000 jobs in the public sector, giving
him the title “jobs president.” Public
spending on the maintenance of
infrastructure under the Moon
administration’s fiscal policy will, therefore, be slashed and redistributed primarily into
welfare and labour, and secondly education.
While unemployment rates remain relatively low in South Korea, compared with other
OECD countries, the rigid dual system, split between regular and non-regular workers,
and SMEs and chaebols, has introduced deep-rooted structural issues to South
Korea’s job market, felt markedly by the younger population. With youth unemployment
on the rise, young graduates in particular tend to fall into low-paid irregular jobs, in part
due to the shortage of high-quality careers available, which is exacerbated by a
relatively rigid labour market that favours seniority. In addition, SMEs made up 99%
of all businesses and employed 88% of South Korea’s workers in 2014. The clear
hierarchy between employment in a chaebol, which boasts greater salary, benefits,
job security, and social prestige, is therefore deeply problematic.
These inequalities in South Korean society,
complicated by the divide between chaebols
and SMEs, have fuelled a labour market
segmentation with huge wage and
productivity gaps between workers.
According to Korea Small Business Instititue,
Labour productivity at SMEs was only 30% of
that at conglomerates in 2014. While Moon
intends to pursue an ambitious policy of
increasing wages, his agenda falls short on
addressing the widening gaps between
productivity necessary to generate major
structural reform.
Political outlook

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Geopolitical outlook
Moon shining? New approaches to international relations
Increased nuclear testing and missile launches conducted by North Korea has
continued to test the South’s patience. Former president Park’s tough approach led the
government to pursue military measures, implementing the US-built Terminal High
Altitude Defence (THAAD) system. The use of THAAD, however, has caused relations
with China to worsen due to concerns over the system’s spying capabilities. In
retaliation, China has imposed a blanket tourism ban on South Korea despite the two
countries’ high level of economic interdependence.
Although it appeared that China and South Korea were beginning to normalise
relations, with an agreement on a currency-swap deal in October, according to South
Korean daily JoongAng Ilbo, from 1st January 2018 the Chinese government once
again brought into effect group tour bans on trips to South Korea.v This decision
followed after Moon Jae-in’s trip to China for the December summit with president, Xi
Jinping, in which Mr Moon was reportedly given the cold shoulder. Hyundai Research
Institute, a leading Korean think-tank, predicted that Korean businesses would lose
$15.6bn of tourism revenue if the boycott continued into 2018 and $76bn in total,
equivalent to 0.5% of GDP.vi Korea Development Bank backed these claims, stating
that other industries could also lose $8.3bn over the disagreement.vii
Economic sanctions against South Korean companies, however, have failed to make
a dent in key exports to China, with outbound goods up 23% in September 2017 due
to high-demand for memory chips among other manufacturing parts crucial for Chinese
firms.viii The selective boycott targeted industries competitive to the Chinese market,
such as beauty products and confectionery, which both saw significant dips in profit.
Even Chinese citizens backed the state initiative, boycotting Lotte-mart stores across
China, which saw 77 of its 99 stores closed by Chinese officials on the pretext of safety
breaches.ixChina’s self-serving actions have been described by many South Koreans
as a case of extreme bullying, with China now occupying bottom place in South
Koreans’ perceptions of other countries.x South Koreans, however, are well aware that
relations with China, their biggest trading partner, are necessary. When Mr Moon took
office, moreover, he stated that he wished to review the THAAD deployment deal,
which appears to be hindering relations with both China and North Korea. xi The
question of security cooperation, however, seems far adrift.
As briefly mentioned, under Moon Jae-in, an advocate for reunification, many expect
to see a recalibration of relations between the two countries. Mr Moon’s personal
experience in negotiating with the North while pursuing the sunshine policy, gives
background to his administration’s seemingly reconciliatory approach. The liberal
sunshine policy, while a costly initiative, demonstrated the South Korean government’s
commitment to advancing a dialogue and improving relations. The warm engagement
that it posited hoped to lead to a more open North Korea—and in some respects, it
did.xii Inter-Korean economic development, for example, was realised in collaborations
such as the joint industrial zone that respected the principle of economic and political
separation without a neocolonialist underpinning. The policy’s critics, however, argued
that North Korean aid and investment was effectively, perhaps even immorally, used
to develop its military and nuclear weapons.xiii

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The North’s path of military provocation, vis-à-vis nuclearisation, has indeed prevented
recent attempts at engagement. The UN, moreover, has tightened its economic
sanctions, in which China now seems more willing to play ball, thus making it difficult
for Mr Moon to reinstate a policy similar to the sunshine initiative. Kim Jong-un’s 2018
new year speech, however, emphasised that he was “open to dialogue” with South
Korea, hoping to send North Korean athletes to the 2018 Pyeongchang Winter Olympic
Games in February.xiv Mr Moon has been very responsive to the North Korean leader’s
offer, describing the opportunity to improve relations as groundbreaking.xv Despite this
positive front, the Moon administration increased defence spending in the fiscal 2018
budget by 7% year-on-year compared with 4% in 2017 in order to meet the North Korea
threat. xvi This move suggests Mr Moon’s flexible approach in dealing with the
geopolitical crisis, which welcomes warmer relations but satisfies conservative
opposition in terms of strengthening South Korea’s military capabilities.
A History that Haunts: relations with Japan
Part of Moon Jae-in’s support comes from his liberal policy proposals that formed in
line with popular public opinion, taking a turn against conservatism following Ms Park’s
impeachment. Keeping his domestic support base pleased, however, has increasingly
put Moon Jae-in under pressure, as he struggles to balance diplomatic relations with
ensuring the public’s disposition is represented.
Moon Jae-in denounced the so-called “comfort-women” (a euphemism for women
forced into sexual slavery) deal signed by Park Guen-hye in 2015, stating that there
were serious flaws in terms of the content of the agreement, which bypassed the
opinions of victims and the Korean public.xvii The agreement itself stipulated that a fund
of ¥1bn (US$9m) would be established for the surviving women and their relatives.
Despite Mr Moon’s concerns that the agreement may require renegotiating, the
Japanese government has maintained a hardline stance on the issue, stating that a
revision of the deal is unfeasible.
Whilst Mr Moon has taken a two-track approach to dealing with Japan, separating
historical issues from cooperation in other areas, arousing the comfort-women talks
may hamper diplomatic relations between the two nations. The issue has already
attracted substantial media attention and risks inflaming negative perceptions of Japan
in the public eye once again due to the two countries’ joint colonial history.
As a liberal party, if an unfavourable outcome is reached, Moon could garner left-wing
backlash from civic groups and unions, which could damage his sustained popularity.
Nikkei Asian Review, furthermore, reported that the issue could cause Abe to decline
his invitation to the 2018 Pyeongchang Winter Olympics in South Korea, adding to
existing tensions over the Dokdo/Takeshima island disputes. xviii Despite these
diplomatic tensions, The Economist Intelligence Unit expects the North Korean threat
to motivate closer security co-operation between the two US allies.

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Macroeconomic outlook
GDP outlook
GDP growth will take a downturn from
3.2% in 2017 to 2.5% in 2018. The
diversification of South Korea’s export-led
growth model will be gradual, meaning
that real GDP growth will remain at the
mercy of the global economy and trade
prospects. As discussed, due to China’s
economic boycott and tourism ban over
the implementation of the THAAD
system, South Korean exporters will be
forced to diversify and seek alternative
markets. Although China’s rising middle-
class will become a source of opportunity
for many exporters, China’s economic
slowdown in 2018 will further encourage
the move away from Chinese markets
and shifts from an export-led growth model. As South Korea’s second largest export
market, the US will also play a strong role in stalling annual economic growth in the
next five years. The Economist Intelligence Unit predicts that the US will fall into
recession in 2020, causing export slowdowns that will further damage South Korea’s
real GDP growth. The 2017 boost from new product releases, furthermore, will taper
off in 2018, dampening global sales.
The government’s fiscal policy, which aims to redistribute spending into welfare,
labour, and education in the 2018 budget, will support private consumption growth,
averaging at 2.2% a year in 2018-22. Consumers, however, will be constrained by
spiralling household debt, which was at W1,419.1trn (US$1.3trn) in September 2017,
including mortgages and consumer credit-card debt, thus limiting growth. The
increase in private consumption, moreover, risks being cut short by the Bank of
Korea’s (BOK, South Korea’s central bank) recent decision to raise its policy interest
rate for the first time in six years since 2011. The BOK’s interest rate hike was
increased from a record low 1.25% to 1.5% on the basis of stable domestic economic
growth and rising inflationary pressure.
Economic
outlook

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Prices and exchange rates
We expect consumer prices to rise by an annual average of 1.8% in 2018-22,
representing a slight dip from 2% in 2017. Consumer price inflation, however, is
forecast to remain low due to South Korea’s susceptibility to unexpected shifts in global
energy prices as a large importer of oil, prices of which are also predicted to remain
low. Falling below the BOK’s target of 2%, weak inflationary pressure is likely to strain
BOK’s monetary tightening policy, with interest rates due another hike by mid-2018.
With China’s economic slowdown in 2018, however, the BOK will prioritise supporting
the growth of its domestic economy, diverging from the Federal Reserve’s accelerated
cycle of monetary tightening. Although global economic conditions will pick up again in
2019, the 2020 US recession will cause
another slog in the domestic economy.
Interest-rate increases, therefore, will be
implemented incrementally so as to
stabilise the fragile economy.xix
Nevertheless, following on from these
global economic hurdles, the Economist
Intelligence Unit expects the BOK to
proceed with interest-rate rises after
GDP growth accelerates and inflationary
expectations are met in 2021-22.
Producer prices are predicted to grow by
an average of 1.8% a year in 2018-2022
as a result of low global commodity
prices.
The won will weaken against the US
dollar in 2018, estimating at an average
of W1,132:US$1 in 2017 compared with
W1,175:US$1 in 2020. This depreciation
of the won, following a period of
appreciation against the US dollar in
2017, is largely the consequence of
dismal prospects for external demand. As
global trade improves, particularly in
China and the US, the won is forecast to
strengthen once again to an annual
average of W1,147:US$1 in 2021-22. In
addition, surpluses on the current and
trade accounts will continue to support
the won. Risk of downward pressure,
however, remains subject to global
economic volatility.

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Trade outlook
As discussed earlier, the slump in exports as a result of economic slowdowns in China
and the US will cause sluggish real GDP growth to continue. While outbound goods in
the automotive industry fell, South Korea performed well in key exports, particularly
semiconductors and OLEDs. The
growing demand for memory
capacity in the tech industry, for
example, could further spur new
growth for South Korea’s domestic
economy, with global giants such as
Google and Amazon requiring
customised chips for high-
functioning data centres.xx Korea’s
current chipmaking prowess is
already recognised by countries
such as China, in which demand for
technological components is soaring
amid the ever-growing use of
internet-connected devices.
In 2017 South Korea saw its trade
balance shrink due to volatile global
trade conditions. We expect South
Korea to achieve, on average, a
current-account surplus equivalent to
5.8% of GDP in 2018-22. Competition
for key exports, as well as global
economic slowdowns over the forecast
period, will hit export growth. This
decrease, however, will be tempered
by subdued import growth, keeping the
trade account in the black. In addition,
as relations gradually normalise with
China in 2018-22, the services trade
deficit will narrow as a result of
increased tourism.

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Labour market
Soaring minimum wage
Moon Jae-in’s ‘people-oriented’ growth model aims to move away from a reliance on
exports towards boosting domestic consumption through increasing the minimum
wage. Part of Mr Moon’s policy platform revolved around the target of a 55% wage
increase to W10,000 per hour by 2020, with the first hike set to be introduced in 2018
at W7,530 per hour, an increase of 16.4%.xxi While the wage increases are intended to
reduce inequalities, many SMEs claim that the policy will force them to lay off
workers—a serious problem when 88% of the population are employed at SMEs. In
addition, spiralling household debts will put downward pressure on consumption,
potentially jeopardising Mr Moon’s strategy for growth.
Despite raising the minimum wage,
a popular and cheap government
reform policy, this strategy alone
fails to address the pronounced
segmentation between regular and
non-regular workers or rising youth
unemployment in South Korea. xxii
The liberal government intends to
tackle these issues by alleviating
household debt pressure, raising
taxes on the wealthiest and
corporate entities, and redistributing
wealth. In terms of fiscal policy, job
creation and welfare benefits will
form key components of Moon’s
people-centred approach.

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The fourth industrial revolution: paradigm shift from exports to
innovation
The fourth industrial revolution refers to a digital revolution that encompasses a fusion
of technologies, blending the physical, digital, and biological spheres.xxiii Welcoming
this new revolution would herald an entire transformation in systems of production,
management, and governance, which is exactly what Mr Moon’s administration intends
for.xxiv
In October 2017, the government launched a new committee consisting of twenty
civilians and five government officials for the intention of discussing and implementing
government policies concerned with the fourth industrial revolution.xxv These policies
will be aimed at greater investment in fields such as Artificial Intelligence (AI), the
Internet of Things (IoT), big data, robotics, autonomous vehicles, and nanotechnology
to name a few. Its critics tout that the concept is no more than a buzzword the
government latched onto in order to propel its campaign of economic growth based on
innovative businesses and new industries. The Economist Intelligence Unit, however,
expects Moon Jae-in to drive a paradigm shift away from an export-led growth model
towards one that prioritises innovation and creativity.
The previous government had already begun orchestrating this shift through cutting off
credit lines and bailouts to large companies, forcing them to restructure. Under the new
administration, however, policy will likely be aimed at increasing public spending on
research and development (R&D) and investing in innovative SMEs. In December
2017, the government announced its plan to inject W3.2tr into R&D, with the Ministry
of Trade, Industry, and Energy increasing investment in next-generation industries by
12.5%, accounting for 29% of total R&D expenditure.xxvi Self-driving cars will also
receive a substantial investment of W149bn in order to reach a target of 350,000
electric vehicles on the road by 2022.xxvii In addition, the Industrial Internet of Things
will receive W81bn and the pharmaceutical and health industries W199bn, an increase
of W42bn.xxviii Renewable energy infrastructure will also see a huge investment of
W417bn so as to meet the nation’s goal of 20% renewable power generation by
2030. xxix With exports in microchips and semiconductors also booming, the
government plan to enncourage these industries by injecting an extra W72bn in R&D
spending.xxx
This focus on reinvigorating SMEs, rather than the chaebols, overlaps with Mr Moon’s
push to close wage and productivity gaps between the conglomerates and SMEs, as
outlined in the labour reform policies. As Economic growth remains slow, however,
curbing the influence of chaebols and the economy’s reliance on exports will be
gradual. Increased investment in SMEs alone, moreover, is unlikely to support the shift
towards the so-called fourth industrial revolution, which many conglomerates are
equally poised to make and take advantage of.

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Business trends, challenges and opportunities
Corporate governance
Mr Moon made corporate governance reform one of his signature economic policies.
South Korea’s conglomerates retain an elitist culture, in which corporate bosses
frequently avoid prison following corruption scandals and are often believed to stand
above the law. The chaebols’ entanglement with former president Park, however, has
signalled growing unrest with this unchecked power, with both Korean citizens and
liberal government policymakers seeking change, regulation, and accountability.
According to KOSPI, the main Korean stock index, the market capitalisation of the
chaebol accounts for 77% of the domestic economy, with Samsung alone capitalising
a huge 41%. Although curbing the influence of the conglomerates poses big risks to
the economy, chaebols in fact carry exceedingly large corporate debts on top of record-
high cash reserves at over W175trn in the past five years. In addition, the chaebols’
profits are rarely funnelled directly to society through jobs and pay rises.
On 5th December, the government endorsed an increase on corporate income tax from
22% to 25% for companies exceeding W300bn in annual profits. This policy is to be
extended to South Korea’s wealthiest individuals, with income tax to increase to 42%
from 40% for those earning more than W500m.xxxi Inheritance, property, and capital
gains taxes also appear to be areas the Moon administration is seeking to increase
revenue. In addition, President Moon appointed well known “chaebol sniper,” Kim
Sang-jo, as chairman of the Korea Fair Trade Commission. Mr Kim pledged to bring
change to the corporate landscape, vowing to enforce laws upon the country’s four big
chaebol—Samsung, Hyundai Motor, SK Group, and LG Corp. The corporate
governance reform, according to Mr Kim, will be two pronged. Firstly, the government
aims to block the concentration of economic power monopolised by the conglomerates,
and secondly, to improve governance structures in order to prevent unfair trade
practices.xxxii
Business
outlook

17. Future Watch – Strategy Brief
17
The liberal government, however, is likely to encounter problems in implementing these
corporate governance reforms due to a fractured parliament in which Minjoo lack the
two-thirds majority. Given the predominance of chaebol in South Korea’s domestic
economy, conservative politicians are likely to support only modest changes on this
front. The Economist Intelligence Unit predicts that Mr Moon will be forced to
compromise on policies against the conglomerates. Therefore, whilst the chaebol’s
economic contribution is likely to remain decisive, Moon is expected to push through
greater regulatory framework in his reforms.
Gender inequality in the workforce
Millions of women in South Korea are discouraged from actively participating in the
domestic workforce, with only 53.1% of women participating in the labour force,
compared with 74.5% for men.xxxiii President Moon has addressed this issue, stating
that low female participation is a loss for the nation.xxxiv The administration is thus
pushing for an extra budget to fund training for women returning to work after maternity
leave in order to tackle the absence of married mothers from the workforce.xxxv Funding
would also be directed at helping women set up their own start-ups, keeping in tune
with Mr Moon’s people-oriented growth-model.
The problem of gender inequality is not limited to participation, but also feeds into wider
structural issues concerning regular and non-regular employment. According to data
from OECD, 53% of women are employed in part-time, temporary positions and lack
job-security, providing women with little incentive to actively participate. South Korea
also boasted the largest gender wage gap among 16 nations surveyed by the OECD,
earning 36.7% less than men.

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Although the number of female executives in the country has been increasing, the
Glass Ceiling Index released by the Economist in 2017 ranked South Korea the lowest
among the 29 countries surveyed.xxxvi Although 7% more women than men entered
universities as of 2009, Korean women comprised of only 19.4% of lawyers, 23.9% of
doctors, and 23% of university professors. In terms of companies, women held only
10.5% of managerial positions and 2.4% of seats on company boards. In 2017,
however, the Korean government announced its plan to increase the number of female
managers in the public sector to 18.8% and initiate training programs to help advance
female managers to executive positions.xxxvii Despite these initiatives, no official quotas
have been set by the government to guarantee such targets.

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R&D and innovation
South Korea continues to be at the forefront of innovation
Over the past decades South Korean companies have made innovation and
technology the cornerstone of their competitive global exports. Ranked number one on
the Bloomberg Global Innovation Index in 2018, Korea scored a total of 89.3 points.
xxxviii The country scored highest in its patent actvity, followed by research and
development (R&D intensity) and manufacturing capability. xxxix However, among
OECD countries, Korea had one of the lowest scores in productivity, which has
remained a constant challenge to businesses.
As a country that produces its fair share of engineers through a rigorous education
system, and continues to invest heavily in developing new technologies, achieving the
top spot is unsurprising. South Korea’s next step lay in harnessing innovative talent
within SMEs and start-ups—a move the government have begun to make. Compared
with their competitors in Silicon Valley, South Korean scientists and enginners are
more inclined to pitch innovative ideas to management within a chaebol than establish
their own start-up.xl The government, however, have been commited to fostering
growth in the start-up scene through initaitives like the creation of the Ministry of SMEs
and Start-ups in May 2017, adding W870bn to its funds.xli This kind of large scale
investment hopes to develop opportunities for innovative SMEs and create an
environment ideal for starting businesses and attracting investment. Coworking
spaces, for example, have exploded in popularity in Seoul, owing to trendy office
designs in central areas that allow for better networking at an affordable price. This has
led WeWork Cos. to open seven branches in South Korea as part of its US$500m bet
on Asia, inspiring local players like FastFive to jump on the bandwagon.xlii

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Most of South Korea’s innovations, however, come from large conglomerates, such as
Samsung and Hyundai. That said, South Korea also ranked highest in Asia on The
Economist Intelligence Unit’s Social Innovation Index in 2016 due to the government’s
active support of open communication, transparency, and data disclosure with its
citizens in Seoul.xliii Involving the population through means of proliferating information
creates democratic policymaking conducive to social innovation. In addition, according
to the report, increasing flows of communication with the public also allows civil issues
to be raised and dealt with effective immediately, thus propelling many innovation
initiatives in communities. While the term “social innovation” itself remains broad, it can
refer to new services, products, processes, rules, and regulations that work towards
achieving social needs. Such initiatives may be based on improving areas such as
education and sustainability as a means of encouraging social innovation, producing
profits and investment returns in some cases. Although the nation lacks an official
social innovation strategy, South Korea supports social enterprise and provides funds
and subsidies for innovative endeavours. With the city of Seoul, Korea’s largest urban
centre, spearheading social innovation and boasting high rates of urbanisation,
retailers and businesses are set to utilise these factors to facilitate distribution
processes.
South Korean firms’ style of “tiger management”, with its roots in Confucianism, has
contributed towards the flexibility and growth of Korean companies.xliv A combination
of success factors from aggressive, goal-oriented business strategies to strong,
charismatic leadership have allowed Korean companies to thrive in global
environments.xlv Team work, collectivism, and hierarchy also play a strong role in the
organizational cultures of Korean companies, which help to develop Korean employees’
high level of motivation and willingness to work long hours.xlvi

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Megatrend
Ageing population and the silver market
Despite South Korea’s edge in innovation, the country faces similar problems
concerning a rapidly aging population to its neighbour, Japan. This megatrend will
become a further drag on the nation’s GDP growth, as an ageing population will require
increased healthcare expenditure on social security contributions to the national
pension and health insurance systems, as well as old-age income security, straining
public finances. In order to achieve fiscal sustainability, the liberal administration will
further raise taxes on corporations and the incomes of the wealthy. According to data
from the latest census statistics from the government, the number of elderly people
over the age of 65 in South Korea reached 6.8million in 2016, comprising 13.6% of its
total population. The National Statistics Office, moreover, claims that Korea is set to
make one of the quickest transitions from an “ageing society” (defined as seniors
making up 7% of the population) to an “aged society,” owing to longer life spans paired
with low fertility rates.xlvii
As the total population continues to decline, the strains of low labour productivity will
curb economic growth, leading many companies to pursue similar technological
approaches as Japan in terms of robotics and AI. In addition, to forestall an imminent
decline in the workforce, the government have been actively discussing raising the age
of retirement from 55 to 60 in order to reduce the tax burden on the younger population
while sustaining economic growth. Many workers, however, are concerned that these
measures will lead to increases in the number of elderly people remaining in or
returning to work, creating intergenerational tensions and obstacles for youths seeking
employment in an increasingly competitive job market.xlviii

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Korea’s ageing population, however, will also offer many lucrative silver market
opportunities for retailers. According to Samsung Economic Research Institute
(SERI), changes in the demographic structure will welcome new products tailored for
seniors onto the domestic market. High-quality goods, such as LCD and Plasma TVs,
and construction materials for housing remodeling, for example, display trends of
growth.xlix Unsurprisingly, the development of generic drugs is also set to emerge as
a promising industry to help individuals cope with the costs of medical inflation. SERI
also predict that the services industry will overtake manufacturing in order to meet the
demands of the silver generation.
In addition, although the number of households will increase at a tepid pace, due to
the ageing population combined with a low birth rate, growth in private consumption
will result in higher purchasing power per capita, spurred on by the liberal
government’s increase in wages and redistributive fiscal policy. Reflecting the ageing
population, this increase will contribute towards the growth of retail categories such
as health and personal care. With the number of households with net incomes above
US$ 50,000 on the rise, increasing from 5,222 to 10,305 in 2017, opportunities for
upmarket retailers, particularly in the market for food and non-alcoholic drinks, will
increase, contributing towards trends in premiumisation.l Rising health awareness, a
major developing global market, is also expected to further drive premiumisation, with
demand for organic food among other health-oriented products surging.
An ageing society is deeply connected to the drive for new technologies as a way of
supporting lagging productivity, a shrinking labour force, and social needs. In the
past, growth tended to be a product of demographics due to increased productivity.
Technologies, moreover, will continue to complement the decline in human capital as
machines become more and more efficient through core computing technology and
self-learning algorithms, leading to greater exponential growth.li South Korea,
alongside China and Japan, bought approximately half of global industrial robots
since 2013 as a part of their strategies for increased automation and use of robotic
technology.lii Offering a tech-savvy community, South Korea is eager to adopt the use
of AI to assist human employees, with one example being robotic airport guides
introduced in July 2017 in preparation for the 2018 Winter Olympics.liii In addition,
future applications of robots are likely to focus increasingly on care, as well as
replacing a dwindling work force. A senior engineer at LG described South Korea’s
sentiment towards the adoption of AI and robots as positive, with many viewing the
use of these key technologies as support solutions rather than a problem. This
optimistic outlook feeds into the government’s push for the fourth industrial revolution,
propelling South Korea towards becoming a “lead market” for innovations in the
digital economy as well as for innovations for ageing societies.

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Endnotes
i Campbell, Charlie. “Moon Jae-in: The Negotiator.” Time Inc., 4 May 2017,
time.com/4766618/moon-jae-in-the-negotiator/
Kyoungtae, Kim. “Snap Election in South Korea: What You Need to Know.” The Asia
Foundation , 22 Mar. 2017, asiafoundation.org/2017/03/15/snap-election-south-
korea-need-know/.
ii Campbell, Charlie. “Moon Jae-in: The Negotiator.” Time Inc., 4 May 2017,
time.com/4766618/moon-jae-in-the-negotiator/
iii “Moon Jae-in easily wins South Korea's presidential election.” The Economist
Newspaper, 13 May 2017, www.economist.com/news/asia/21721868-governing-
country-will-be-harder-moon-jae-easily-wins-south-koreas-presidential-election.
v Yamada, Kenichi, and Shunsuke Tabeta. “Missile shield seen as a sticky thorn in
China-South Korea ties.” Nikkei Asian Review, 22 Dec. 2017,
asia.nikkei.com/Politics-Economy/International-Relations/Missile-shield-seen-as-a-
sticky-thorn-in-China-South-Korea-ties.
“A geopolitical row with China damages South Korean business further.” The
Economist Newspaper, 19 Oct. 2017,
www.economist.com/news/business/21730477-south-korean-industries-ranging-
tourism-carmaking-are-being-badly-affected.
vi “South Korea is making up with China, but a sour taste remains.”The Economist
Newspaper, 9 Nov. 2017, www.economist.com/news/china/21731123-choosing-
between-trump-and-xi-isnt-always-easy-south-korea-making-up-china-sour.
vii Ibid.
viii Jaewon, Kim. “South Korean business improves in China ahead of Moon's first
visit.” Nikkei Asian Review, 13 Dec. 2017,
asia.nikkei.com/Business/Companies/South-Korean-business-improves-in-China-
ahead-of-Moon-s-first-visit.
ix “A geopolitical row with China damages South Korean business further.” The
Economist Newspaper, 19 Oct. 2017,
www.economist.com/news/business/21730477-south-korean-industries-ranging-
tourism-carmaking-are-being-badly-affected.
x “South Korea is making up with China, but a sour taste remains.”The Economist
Newspaper, 9 Nov. 2017, www.economist.com/news/china/21731123-choosing-
between-trump-and-xi-isnt-always-easy-south-korea-making-up-china-sour.
xi “Moon Jae-in easily wins South Korea's presidential election.” The Economist
Newspaper, 13 May 2017, www.economist.com/news/asia/21721868-governing-
country-will-be-harder-moon-jae-easily-wins-south-koreas-presidential-election.

24. Future Watch – Strategy Brief
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xii Park, S. Nathan. “Moon's Secret Weapon Is Sunshine.” Foreign Policy, 19 May
2017, foreignpolicy.com/2017/05/19/moons-secret-weapon-is-sunshine-south-korea-
kim-jong-un/.
xiii Stanton, Joshua, et al. “Getting Tough on North Korea.” Foreign Affairs, 7 Aug.
2017, www.foreignaffairs.com/articles/north-korea/2017-04-17/getting-tough-north-
korea.
xiv “South Korea proposes high-Level talks with North on Olympics.” BBC News, BBC,
2 Jan. 2018, www.bbc.com/news/world-asia-42538323.
xv Ibid.
xvi “Economic Analysis - 2018 Budget: Focus On Job Creation - JAN 2018.” Asia
Monitor, www.asia-monitor.com/economic-analysis-2018-budget-focus-job-creation-
jan-2018.
xvii Minegishi, Hiroshi. “'Comfort women' deal not a solution: President Moon.” Nikkei
Asian Review, 28 Dec. 2017, asia.nikkei.com/Politics-Economy/International-
Relations/Comfort-women-deal-not-a-solution-President-Moon.
xviii “South Korean navy begins 2-Day exercise for defense of disputed islets.” Nikkei
Asian Review, 28 Dec. 2017, asia.nikkei.com/Politics-Economy/International-
Relations/South-Korean-navy-begins-2-day-exercise-for-defense-of-disputed-islets.
xx Harris , Bryan , and Song Jung-a. “Samsung record profits mask crisis without and
within.” Financial Times, 14 Oct. 2017, www.ft.com/content/981eed6c-9c46-11e7-
8cd4-932067fbf946.
xxi “South Korea's soaring minimum wage.” The Economist Newspaper, 25 Oct.
2017, www.economist.com/blogs/economist-explains/2017/10/economist-explains-
21.
xxii “South Korea tries to boost the economy by hiking the minimum wage.” The
Economist Newspaper, 12 Oct. 2017, www.economist.com/news/asia/21730187-70-
median-wage-it-going-too-far-south-korea-tries-boost-economy-hiking.
xxiii Schwab, Klaus. “The Fourth Industrial Revolution: what it means and how to
respond.” World Economic Forum, 14 Jan. 2016,
www.weforum.org/agenda/2016/01/the-fourth-industrial-revolution-what-it-means-
and-how-to-respond.
xxiv Ibid.
xxv Stewart , George . “South Korea - The Presidential 'Fourth Industrial Revolution
Committee' Was Officially Launched.” Openeyesopinion.com, 16 Oct. 2017,
www.openeyesopinion.com/south-korea-the-presidential-fourth-industrial-revolution-
committee-was-officially-launched/.
xxvi Woo-hyun, Shim. “Korea to invest W3.1tr to support next-generation industries.”
The Korea Herald, 26 Dec. 2017,
http://m.koreaherald.com/view.php?ud=20171226000699#cb

25. Future Watch – Strategy Brief
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xxvii Ibid.
xxviii Ibid.
xxix Ibid.
xxx Ibid.
xxxi Kim, Peter S. “Moon's tax hikes too big for South Korea's economy.” Nikkei Asian
Review, 3 Jan. 2018, asia.nikkei.com/Viewpoints/Peter-S.-Kim/Moon-s-tax-hikes-too-
big-for-South-Korea-s-economy.
xxxii Harris , Bryan . “President Moon's tricky mission to tame Korea Inc.” Financial
Times, 13 Sept. 2017, www.ft.com/content/fa1e3e00-947b-11e7-bdfa-eda243196c2c.
xxxiii Kim, Hooyeon, and Myungshin Cho. “Gender Inequality Is a Risk for South
Korea's Workforce.” Bloomberg, 4 July 2017,
www.bloomberg.com/news/articles/2017-07-04/gender-inequality-is-a-risk-for-south-
korea-s-workforce.
xxxiv Ibid.
xxxv Ibid.
xxxvi The Economist Newspaper, infographics.economist.com/2017/glass-ceiling/.
xxxvii “Women in the boardroom: A global perspective - 5th edition” Deloitte Touche
Tohmatsu Limited., 2017.
xxxviii Jamrisko, M. & W. Lu. "U.S. Falls as South Korea Ranks No.1 Again in
Innovation Index", January 27th 2018, Bloomberg. URL:
https://www.bloombergquint.com/global-economics/2018/01/22/south-korea-tops-
global-innovation-ranking-again-as-u-s-falls.
xxxix Ibid.
xl“2016 Bloomberg Innovation Index South Korea Takes Top Spot.” 20 Jan. 2016.
https://worldindustrialreporter.com/2016-bloomberg-innovation-index-south-korea-
takes-top-spot/.
xliRamirez, Elaine, “Slow And Steady Wine The Race In South Korea’s Startup
Scene.” Forbes, 3 Jan. 2018.
https://www.forbes.com/sites/elaineramirez/2018/01/03/slow-and-steady-wins-the-
race-in-south-koreas-startup-scene/#660c33b848db.
xliiYoolim, Lee, and David Ramli. “WeWork to Pump $500Million Into Southeast Asia,
South Korea.” Bloomberg, 7 Aug. 2017.
https://www.bloomberg.com/news/articles/2017-08-07/wework-to-pump-500-million-
into-southeast-asia-south-korea.
xliiihttp://www.ebanimpact.org/wp-content/uploads/2017/01/Social_Innovation_Index-
1.pdf .
xliv Hemmert, Martin, The Evolution of Tiger Management. (Routledge) Oct. 2017.
xlv Ibid.
xlvi Ibid.

26. Future Watch – Strategy Brief
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xlvii Sook-hee, Choi. “Korea’s Rapid Population Aging: Impact and Policy Suggestions”
Samsung Economic Research Institute,2008,.p.3.
xlviii Sang-ok, Lee , and Tan Teck-boon. “South Korea's demographic dilemma.” East
Asia Forum, 24 Mar. 2016, www.eastasiaforum.org/2016/03/25/south-koreas-
demographic-dilemma/.
xlix Sook-hee, Choi. “Korea’s Rapid Population Aging: Impact and Policy Suggestions.”
Samsung Economic Research Institute, 2008.p.7.
l “South Korea Retail Report: Includes 5 year Forecasts to 2021.” BMI Research, March
2017.pp.1-38.
li Woetzel, Jonathan, Automation, Jobs and Future Work in Korea. IGE Distinguished
Lecture Forum, 13 April 2017.
lii “Robots may help defuse demographic time bomb in Japan and Germany.” The
Japan Times, 30 May 2017.
https://www.japantimes.co.jp/news/2017/05/30/business/economy-business/robots-
may-help-defuse-demographic-time-bomb-japan-germany#.WlhnASOQ1R0
liii Babe, Ann. “Why South Korea is an ideal breeding ground for robots.” BBC, 6 Dec.
2017. http://www.bbc.com/travel/story/20171205-why-south-korea-is-an-ideal-
breeding-ground-for-robots